I have noticed over the last couple of weeks on this site the increased mention of former President Ronald Reagan and the negative impacts of his economic policies on various aspects of the United States economy. I was a 24 year old young man when Reagan was elected, and remember very well the economic conditions that were at play when he was elected. So I came to an agreement with Mr. Galt that I would do a piece on the effects of the Reagan tax policies. I made a commitment to myself to keep my personal opinions out of the piece, and to instead focus on the numbers involved. I wanted to endeavor to put together an article that was as honest as I could. I did not wish to make it a slanted, one sided article because I believed I owed that to you all. As I have come to be associated with you all there is an underlying theme, we all care about our Country a great deal. I am going to focus on four central themes, 1) The revenue generation of the Reagan tax cuts, 2) the effects on the manufacturing sector of our economy, 3) the generation of wealth the policies created and 4) the effects on the Federal deficit.
The first issue is the tax revenue created for the U.S. Treasury. When Reagan assumed office in 1981, the top marginal rate of income taxes was 70%. Through a series of cuts signed into law (The Economic Recovery Act) in August of 1981, income tax rates were cut by a total of 25%. The initial rate cut became effective in October of 1981, the second, a cut of 10%, became effective in July of 1982 and the final cut of 10% was put into effect in July of 1983. The law also reduced the top rate from 70% to 50%, indexed the rates to offset the effects of inflation and increased the exemption on estates and gifts. The total amount of these tax cuts was $162 billion!
Yet this was still not enough for the Gipper! In 1985, Reagan approached Congress with another set of reforms which lowered the top marginal rates again to 33% and did away with numerous business tax deductions such as the “three martini lunch”. The law also simplified the tax brackets and increased personal exemptions so that some 4.3 million low income earners were removed from the tax roles. Another feature of this particular reform was the inclusion of a “minimum tax”, so the rich could not escape paying some amount of tax. The top rate was eventually lowered to 31% near the end of Reagan’s second term. What came about because of these cuts was the longest period of peace time economic expansion since the Government began keeping records in 1854. In 1982, tax revenue to the Treasury was $618 billion. Five years later, Federal receipts were just over $1 trillion, an increase of $398 billion!
Much has been made over the years of the decrease of the manufacturing base in the United States. While the reasons for this are numerous, much of the blame has been put on the Reagan administration. What exactly was the record regarding the manufacturing sector? First we must have a baseline. According to the Bureau of Labor Statistics, manufacturing jobs went from 19.3 million in January of 1980 to 18.6 million in January of 1981 when Reagan assumed office. By the end of Reagan’s second term, manufacturing jobs were at 18.1 million, so there was a reduction of 500,000 jobs during his eight years in office. However, as a result of the severe recession which occurred early in Reagan’s first term, jobs in the manufacturing sector sank to 16.7 million in January of 1983. This points to a rebound of 1.4 million manufacturing jobs in the last 5 years of Reagan’s presidency! I’m not trying to soft sell this number, but since then manufacturing job levels in this country have declined to 13.4 million as of 2008!
While some of this is a result of regulation and a steady increasing of corporate taxes, there is little doubt other factors are at work. The largest one that cannot be ignored is that the technology of today has quite simply made American workers more productive! Another factor is that it is not economically feasible to manufacture something that can be produced cheaper elsewhere. The global economy has put pressure on business to cut costs or close plants. This is undeniable! Yet despite all that negative pressure on the manufacturing sector, the United States still leads the world with a 22% share of global manufacturing value, a rate that has remained relatively unchanged for the last 30 years!
This brings me to one of the most contentious issues of the Reagan Presidency, the wealth that was created due to the policies that were enacted. Let me first say that I, for one, can’t believe that wealth creation in the United States would be a controversial topic, but it is! One of the first complaints about Reagan’s policies was that the wealth that was generated went to the “rich”. The facts point to something entirely different! First of all, families in the “middle class” (those earning between $20,000 -$50,000) had a 28% increase in their net worth. 47% of the middle class quintile in 1979 had an increased standard of living by 1988, 33% had no change and only 20% had a decrease. Of those in the poorest quintile in 1979, a staggering 88% showed an increased standard of living by 1988! The poverty rate in this country dropped from 15.2% during the recession of 1982 to 12.8% when Reagan left office.
Now for the most contentious part (I don’t understand why) of the 80’s economic record. In 1980, only 5,000 individuals had incomes exceeding $1 million dollars per year. By 1988 there were more than 50,000 millionaires and 50 billionaires! And they didn’t “hoard” their wealth either! Charitable donations climbed a staggering 57% during the 80’s from $65 billion in 1980 to over $100 billion in 1988! The other aspect of this that must be reflected upon is that the 80’s were the period in which entrepreneurism exploded. Small business growth in this country expanded, giving individuals not only a higher standard of living, but a potential for economic freedom this country had rarely offered.
One last issue that must be examined is the fact that, due to the complexities of the tax code, most small business owners file as individuals. This is probably the least understood aspect of the so called “rich” in this country. The critics of Reagan look to the individual numbers and bemoan the fact that the wealth is in the hands of so few. The simple fact of the matter is that these small business owners create the bulk of new jobs in a growing economy! This is a fact that the politicians ignore (they know it to be true), and it creates economic ripples throughout the economy that affects each and every one of us.
Lastly, I will examine the effects of Reagan’s policies on the deficit. Here is a news flash – the federal deficit grew during the Reagan Presidency! There were, however, several reasons why this occurred! The one that is mentioned most often was Reagan’s increases in the military budget. While his increases were large (up $182 billion from the Carter administration), this doesn’t tell the whole story! With the additional revenue generated through tax cuts, had spending remained constant there would have been a $55 billion surplus! What happened? The first, and most important factor was the TEFRA (Tax Equity and Fiscal Responsibility Act) of 1982. This legislation increased excise and business taxes by $98 billion, in exchange for negotiated reductions in federal spending. Howard Baker, then the Senate Minority Leader, had negotiated with the Democrats, who controlled both houses of Congress, a $3 reduction in spending for every $1 in additional taxes raised by this legislation. In fact, Congress achieved only 23 cents per dollar in spending cuts! As it turns out, the Soviet Union wasn’t the only group he should have applied the “trust but verify” theory to! Regardless, Reagan borrowed $1 for every $5 spent, thus driving the national debt upwards. As a measure of GDP, the deficit was increased approximately two-tenths of one percent. While this seems to be a small percentage, it still increased significantly in real dollars. Reagan did reduce some aspects of federal spending during his two terms, but fell far short of his own goals.
In conclusion, I hope I didn’t paint too much of a conservative “rose colored glasses” scenario of the Reagan years. As with any other leader in our country’s history, he had his flaws and his own set of hurdles he had to overcome. I have no doubt that anybody will be able to find their own “analysis” to contradict the premise which I have laid out in this article. However, you will not be able to contradict the facts contained in it! I have seen several posts on this site lately which have pointed to the Reagan years as the beginning of the stagnation of wages in the United States. I have included a totally irrelevant link to a study which actually points to a lack of increased productivity as the cause of this phenomenon. THE CONCLUSION THAT WE CAN DRAW FROM THIS IS TWO FOLD! Either America has truly reached it’s zenith, or, as I believe, it is quite simply time for the federal government to decrease it’s role in our everyday life. Perhaps it’s time for us to adhere to the words of John F. Kennedy, “Ask not what your country can do for you, ask what YOU can do for your country!”