Despite recent use of the term “Bidenomics,” few presidents have been so attached to their economic policies that their very name becomes emblematic of them. Certainly none are more famous, or debated, than Ronald Reagan’s policies. Some conjure visions of unbridled American wealth that touches every corner of the nation while others see nothing but a Ponzi scheme disguised as economic theory. This contrasting legacy makes it hard to assess what Reaganomics is. As calls for a return to Reaganomics are met with excitement and dismay, it would be helpful to remove some of the mystique surrounding this term.

The basic definition of Reaganomics will be discussed along with one of the key theories, supply side economics, which influenced its development. The two most important examples of Reaganomic legislation, The Economic Recovery Act of 1981 and The Tax Reform Act of 1986, will then be discussed. The effects of these legislations will be assessed as well as a recent attempt at reinstituting Reaganomics. Lastly, some closing remarks will be made on how Reaganomics should be viewed today.

 

What is Reaganomics?

Before delving into what Reaganomics was, it is important to mention the economic environment Ronald Reagan inherited. Ronald Reagan was sworn in January 20, 1981, and was thrust into an economy still reeling from the “Volcker Shock.”^[1] Paul Volcker was the head of the Federal Reserve as Reagan was coming into office, and had been cutting down on the quantity of money in the economy to end the Stagflation of the 1970s .^[2] These shaky economic times helped Reagan get elected and once in office, he made his top priority fixing the economic crisis the U.S. faced.^[3] His economic goals were centered around four pillars: reduced government spending, lower taxes, less regulation on businesses, and control of money supply growth. Reagan kept Volcker in his position to continue the shock treatment that seemed to be working for the money supply and focused his efforts on a tax strategy.^[4]

The Napkin that Defined the Nation: The Laffer Curve

The flagship of Reagan’s economic policy would be rooted in supply side economics. This theory of economics emphasizes the creation of incentives for goods and services. Most commonly this is achieved by lowering tax rates, giving greater returns to individuals after taxes have been taken from compensation or investments.^[5] A famous example of this theory was formulated by economist Arthur Laffer in 1974. Though there is still some mystery around the details, Laffer’s Curve was allegedly invented at a restaurant. While discussing economics with journalist Jude Wanniski and two politicians (Dick Cheney and Donald Rumsfeld), Laffer wrote out on a napkin his claim that high rates of income taxation would eventually lead to lower tax revenue.^[6] In turn, lower rates would spur greater economic growth as people would have more wealth to invest and consume with.^[7] The famous napkin from this meeting is marked with language stating: “We’ve been taxing work, output, and income and subsidizing non-work, leisure and unemployment. The consequences are obvious!”^[8] Once in office, Reagan learned of the economic theory, which meshed perfectly with the popular support for tax cuts and his own vision of how to guide the U.S. economy. All that was left was to put the theory into practice.

 

The Theory Put to Practice: Reaganomics in Action

Trying Trickle Down: The Economic Recovery Act of 1981

As noted above, nothing was more important to Reagan’s economic approach than tax cuts. The influence of the Laffer curve can be seen in the Economic Recovery Act of 1981. One of the Act’s main sponsors, New York Congressman Jack Kemp, was a known advocate for supply side economic theories. The primary objective of the Act was to lower taxes on higher income earners to encourage more economic growth and investment that would benefit everyone in the nation. This is why Reaganomics and supply economic theories are often referred to as “trickle down economics.”

The term “trickle down economics” was actually coined by social commentator Will Rogers several decades earlier to mock to President Hoover’s policies during the Great Depression.^[9] Regardless of the negative connotation, the 1981 Act was motivated by the idea that benefits to high earners would “trickle down” to everyone in the economy. One major element of the 1981 Act was the Accelerated Cost Recovery System (ACRS), which changed the way depreciation was counted, leading to significant reductions in tax burdens on businesses.^[10] There were also a number of tax cuts across individual income tax brackets. The top rate was slashed from 70% to 50% over 3 years, while even the lowest tax rate was reduced by 3%.^[11] Finally, the capital gains tax rate was slashed by 8% from 28% to 20%. This would not be Reagan’s only attempt at using tax cuts to spur economic growth, a continuation would arrive in 1986.

Reaganomics’ Focus Expands: The Tax Reform Act of 1986

The Tax Reform Act of 1986 continued Reagan’s approach with the top rate being reduced again, from 50% to 28%. It should be noted this bill also featured an increase to the lowest tax rate from 11% to 15%, which was not only the first time in history that the highest rate was lowered while the lowest rate was raised, but also offset the reductions to the lowest bracket set by the 1981 Act.^[12] The 1986 Act also went beyond tax cuts by making existing taxes more effective through closing loopholes in the tax code. For example, those claiming children as dependents now had to provide social security numbers for the children claimed. Likewise, the Alternative Minimum Tax, which sets the floor for the minimum amount of tax someone must pay after credits and deductions have been taken into account, was expanded – raising the floor. Finally, the deduction provided for home mortgages was increased to help spur homeownership.^[13] It can readily be seen that both acts dramatically altered the U.S. tax landscape; the remaining question is whether those changes were successful.

 

Is Reaganomics Tact or Talk?

People in the United States continue to clash over whether Reaganomics (and even tax cuts generally) help or harm the economy. One of the most common criticisms of Reaganomics is that the idea of “trickle down” or supply side economics are simply unsound economic policy. The Laffer Center stresses that the Laffer Curve does not imply that a tax cut will always raise revenues. Rather, they argue the Curve reflects that a tax cut may increase economic activity and in turn raise revenues.^[14] The difference is subtle (if existent) and the actions of people like Jack Kemp may reflect a misunderstanding of this theory. Perhaps, Congressman Kemp was interpreting that a tax cut may help, but it seems, given the significant tax changes made and general public support for such a cut, that people believed a tax cut would be a miracle remedy for the wounded U.S. economy. Thus, the Laffer Curve may be a victim of misinterpretation or oversimplification. It should be noted, despite skepticism of this theory, the U.S. tax regime  acknowledges an “effective level” of taxation, where revenues are maximized without altering individual behavior implying there is a general acceptance that a tax cut may actually bolster revenues. A better assessment of whether Reaganomics works or not can be seen in the actual impact of his tax policies.

What Gets the Credit? The impact of Reaganomics

Several statistics of the Ronald Reagan Foundation tout significant achievements that resulted from Reaganomics over President Reagan’s 8 years in office. First, 20 million jobs were created, and the areas of finance and technology expanded over the 8 years thanks to greater economic flexibility.^[15] Hand in hand, unemployment dropped from 7.6% to 5.5% with more than half of these new jobs going to women and a 25% increase in African American employment from 1982-1988.^[16] Finally, Real Gross National Product (RGNP) grew by 26%, which is equated to the increase in investment by those receiving the highest tax cuts.^[17] There was also some evidence to reflect that “trickle down” economics was having an effect. Following the 1981 Act, there was an economic boom in 1982. This boom was concentrated in the investment spaces of stocks, bonds, and real estate. The new wealth generated by the top investing and profiting in these spaces led to a number of lower level positions like bankers and accountants seeing significant growth in their wages. In turn, they had more wealth to spend on services in further downstream positions like retail and childcare services.^[18]

Despite these successes, there are reasons to think the impact of Reaganomics may have been skewed. For example, the 1981 Act, which was arguably a purer example of supply side economic policy than the 1986 Act, had to admit some defeats. First, the critical changes made via the ACRS were repealed only a year after the 1981 Act was enacted.^[19] Second, the projected losses in tax revenues under the 1981 Act were so steep that the Reagan administration had to add a tax increase on businesses in 1982.^[20] The 1986 Act did not face as much back pedaling as the 1981 Act, but may not have delivered all of the desired results. One criticism is that the 1986 Act did not go nearly far enough in addressing a variety of tax loopholes that inhibit economic growth.^[21] Another is that the loopholes that were covered have crept back into the system despite the efforts of the 1986 Act.^[22]

Kansas Tries it Hand at Reaganomics: The 2012-2013 Tax Cuts

In 2012 and 2013 Governor Sam Brownback of Kansas urged the legislature to pass significant tax cuts. The Governor’s hope was that these would serve as “a shot of adrenaline into the heart of the Kansas Economy.”[23] The cuts included a nearly 30% decrease on the top tax bracket and removing a tax entirely on business profits for certain entities including: sole proprietorships, partnerships, and S-Corps. The results of these cuts were less than stellar. The private sector of Kansas saw 4.2% job growth from 2012 to 2017 while the U.S. saw an overall 9.4% growth rate. Further, of Kansas’ neighboring states, it only beat out Oklahoma in private sector job growth.[24] The number of Kansas residents listing income from S-corps and partnerships only grew 4.1% from 2012 to 2015 while across the U.S. there was a 5.4% growth rate. Once again, Kansas’ rate only bested one of its neighbors: Missouri.[25]

As noted above, a key element of supply side economics is that it will encourage people to invest and most importantly create businesses that would spur economic growth. However, between 2012 and 2016 labor force participation in Kansas declined slightly from 80.8% to 80.3% posing a real challenge to a key element of supply side economic theory. Arthur Laffer himself stated prior to the cuts that they would have “near immediate and permanent impact” but stated after the tax plan shortfalls that states have “bad times” and that “taxes are not 100% of everything.”[26] The outcomes in Kansas do raise some doubts about the viability of Reaganomics especially in applying it today. It at the least revealed several pitfalls of making significant tax cuts in a short period of time. What is interesting is that despite Kansas overwhelmingly repealing these tax cuts in 2017, Kansas’ belief in tax cuts has not disappeared. Just this year, the Kansas House of Representatives unanimously passed a tax bill focused on several tax cuts.[27] However, these cuts are far less significant than the 2012-2013 changes (and may face obstacles in the state senate) so perhaps it signals a belief among Kansans that tax cuts can work but they can certainly be taken too far.

 

Conclusion

It seems like the problem of assessing the definition and the success or shortcomings of Reaganomics are one in the same: a lack of baselines. What did the administration think supply side economics could do? What was Laffer trying to argue? Were later changes to the 1981 Act refinements of Reaganomic policy or defeats? Is Kansas the standard or the outlier? Acknowledging that Reaganomics helped the economy out of a slump without closing the wealth gap between the economic classes may be the closest to a balanced answer. A tax cut-oriented approach to the economy might help or harm our economy in a number of different ways. One thing is certain, if Reaganomics is given another go, we should call it something else. As Ronald Reagan put it: “I could tell our economic program was working when they stopped calling it Reaganomics.”^[28]

 

 

 

^[1] Reaganomics: Economic Policy and the Reagan Revolution, Ronald Reagan Presidential Foundation (2024).

^[2] Ages of American Capitalism, Jonathan Levy

^[3] Id.

^[4] Id.

^[5] About Supply-Side Economics, the Laffer Center (2024).

^[6]  Ages of American Capitalism, Jonathan Levy

^[7] Id.

^[8] Id.

^[9] Why Trickle-Down Economics Works in Theory But Not in Fact, Kimberly Amadeo (2021).

^[10] Economic Recovery Tax Act of 1981 (ERTA), CFI (2024).

^[11] Id.

^[12] Tax Reform Act of 1986: Overview and History, Julia Kagan (2023).

^[13] Id.

^[14] About Supply-Side Economics, the Laffer Center (2024).

^[15] Reaganomics: Economic Policy and the Reagan Revolution, Ronald Reagan Presidential Foundation (2024).

^[16] Id.

^[17] Id.

^[18] Ages of American Capitalism, Jonathan Levy

^[19] Economic Recovery Tax Act of 1981 (ERTA), CFI (2024).

^[20]  Ages of American Capitalism, Jonathan Levy

^[21] Twenty Years Later: The Tax Reform Act of 1986, Andrew Chamberlain (2006).

^[22] Id.

[23] Kansas Provides Compelling Evidence of Failure of “Supply-Side” Tax Cuts, Michael Mazerov (2018).

[24] Id.

[25] Id.

[26] Id.

[27] Kansas House unanimously passes tax bill, final deal far from done, Shawn Loging & Matt Heilman (2024).

^[28] Reaganomics: Economic Policy and the Reagan Revolution, Ronald Reagan Presidential Foundation (2024).