When President Ronald Reagan began his first term in 1981, the US economy was struggling. Unemployment was high and rising, and in 1979 inflation reached a peacetime high.
In an effort to deal with these problems,
the Reagan administration introduced a number of economic policies, including tax cuts for large corporations and high-income individuals.
The idea was that tax savings for the rich would lead to additional savings for everyone else, and for this reason, these policies are often referred to as trickle-down economics.
From the 1980s to the late 1990s,
America experienced the longest and strongest period of economic growth in its history. Average earnings rose, as did the rate of job creation.
Since then, many politicians have used the trickle-down theory as a justification for tax cuts—but do these policies actually either stimulate economic growth, or make things better for Americans?
Works in terms of making?
Will they work in other situations?
To answer these questions, the important things to consider are whether the effects of a tax cut on the government's tax revenue are detrimental, whether the tax savings actually stimulate the economy, and whether stimulating the economy actually benefits people.
Lives improve.
The idea behind tax cuts is that if taxes are too high, people will be less willing to work, which will ultimately reduce tax revenue.
So at a lower tax rate, the government can actually collect more tax money that it can theoretically use to improve the lives of its citizens, because people will work more when they keep more of their earnings.
Will Of course, there is a limit to how much the government can cut taxes: a zero tax rate generates no tax revenue no matter how much people work.
So while cuts from a very high tax rate can be fine, cuts from a low tax rate can be counterproductive, hindering the government's ability to get things done.
When Reagan took office, the tax rate was very high.
His administration reduced the top income tax bracket from 70% to 28% and the corporation tax from 48% to 34%. By comparison, by early 2021, those rates were 37% and 21%, respectively.
When tax rates are low, tax cuts for the rich can be harmful. For example, from 2012 to 2013, lawmakers cut the top tax rate in the state of Kansas by nearly 30% and reduced some business tax rates to zero.
As a result, the government's balance sheet quickly fell into negative territory and did not recover, meaning that wealthy individuals and companies did not reinvest in the economy.
In short, the money did not decrease.
This appears to be a trend: In a study across several periods of history and 18 countries, the London School of Economics found that tax cuts increased the wealth of the top 1%, but did little for the economy as a whole.
There was an effect. . For tax cuts for the rich to really stimulate the economy, they would have to spend the money saved to put it back into, for example, local businesses — but in practice that doesn't happen.
No economic policy works in isolation
Each time and place is unique with multiple policies at the same time, so there is only one test case for each set of scenarios.
This makes it difficult to make definitive judgments about whether an economic policy worked, whether something else could work better, or whether it would work in a different situation.
And yet, the rhetoric about economics, both during the Reagan era and since, often promises something certain: that the wealthiest members of society will spend on things other than taxes.
Spending directly improves the financial conditions of the less wealthy. And there isn't much evidence to support it.
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