The Leaders We Deserved (and a Few We Didn't) by Alvin S. Felzenberg

Author:Alvin S. Felzenberg
Language: eng
Format: epub
Publisher: Basic Books
Published: 2010-05-04T16:00:00+00:00

Ronald Reagan

Ronald Reagan was the most economically successful president in the last third of the twentieth century. Unlike his four predecessors, Reagan was willing to endure the short-term pain of a monetary-induced recession in order to quell inflation. He reduced marginal income tax rates and expanded upon the deregulation initiative Carter began. Reagan looked upon these measures as ways to release the creative and entrepreneurial impulses of the American people, which had been blocked from achieving their full potential by the disincentives of high taxes and excessive regulations. He launched important international initiatives—the Free Trade Agreement with Canada and the Uruguay Round of multilateral negotiations—that would deeply integrate the United States into a global economy over the next two decades. In all, Reagan’s politics helped produce an eight-year expansion of the American economy and paved the way for an unprecedented eighteen years of growth.

Reagan’s economic policies were shaped, at least in part, by what he had studied in school. He majored in economics at Eureka College before Keynesian economics became popular among academics, and he left familiar with the foundations of neoclassical theory. During his years in Hollywood, Reagan, drawing on his own experience, concluded that high taxes discouraged work and that lower taxes carried with them incentives for greater productivity. When he ran for president in 1980, Reagan proposed cutting individual income tax rates by 30 percent over three years and accelerating tax depreciation schedules for business investment. During the summer of 1981, Congress modified Reagan’s proposal by cutting individual income tax rates by 25 percent over four years. Among other things, it also reduced the maximum capital gains tax rate to 20 percent, expanded tax deductions for retirement savings plans, and indexed tax brackets for inflation. It also substantially reduced windfall profits taxes. Reagan signed the Economic Recovery Tax Act (ERTA) into law on August 13, 1981.

In 1982 and 1984, Congress rescinded some of ERTA’s provisions relating to business but left most of its other provisions intact. While Reagan had proposed making the first 10 percent rate cut retroactive to January 1, 1981, ERTA’s first 5 percent rate cut took effect on October 1, 1981. Thus, the effective rate cut for 1981 was only 1.25 percent. Since indexation did not become effective until 1985, bracket creep prevented individual taxpayers from receiving a real income tax reduction until January 1, 1983, about the time economic expansion began. In 1984, Reagan instructed Secretary of the Treasury Donald Regan to prepare a comprehensive tax reform package that, unlike ERTA, would be simple and revenue neutral (i.e., deep rate reductions would be offset by reductions in tax deductions and credits). The resulting Tax Reform Act of 1986 slashed the maximum individual income tax rate from 50 percent to 28 percent and the maximum corporate income tax rate from 46 percent to 35 percent.

The Reagan administration’s approach to inflation also broke with recent precedent. To combat the recession of the first half of 1980, Carter’s last year in office, the Federal Reserve accelerated

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