An Unwritten History – (6) Reaganomics

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          The icing on the cake is Reaganomics, also referred to as “trickle down” or “voodoo” economics.  This is something Ronald Reagan himself touted in his farewell speech as “common sense,” asserting that when you reduce taxes, people work harder and produce more, stimulating the economy.  This is not only untrue, it defies common sense.

          Allowing very wealthy individuals to keep a higher percentage of their income will have virtually no effect on their spending patterns, as they already can spend as much as they like without constraints and are already saving most of their income.  Reducing their personal income taxes, therefore, makes more money available for investment, but investment will increase only in respond to additional demand.  Nothing really trickles down. 

          For the same reason, a reduction in corporate income taxes will not stimulate economic growth if corporations are already producing at a profit maximizing level.  The lower taxes merely allow corporations to keep more of their profits as retained earnings.            

          Although there is little or no reason to believe that reducing personal income taxes for moderate and low income people provides a mechanism or incentive for them to work harder, it does increase their spending (according to their propensity to spend marginal net income), which increases economic activity and stimulates growth.  In fact, this is the primary Keynesian macroeconomic tool (“fiscal policy”) for influencing the level of economic activity.  So giving a tax break to the very rich instead of larger numbers of people with lower incomes simply results in a lower level of economic activity. 

          The application of Reaganomics during the GW Bush administration, as we have seen, had exactly this consequence.  Reaganomic tax policy, together with Wall Street excesses, sent the economy into the deepest trough since the Great Depression.  Wealth accumulation at the top had already progressed so far that the middle class and people with lower incomes were on average spending beyond their means.  Thus, an additional $500 billion tax decrease for them over those years, instead of for the rich, would have stimulated the economy and tamed their run-up of personal debt.

          In short, Reaganomics tax policy, just like the other aspects of the Reagan Revolution discussed above, simply makes the rich richer at the expense of everyone else.  The upshot is that the Reagan Revolution has consisted of a systematic use of federal tax dollars for corporate profit, transferring wealth directly to the very rich from all taxpayers.  This profiteering has also meant that the taxpayers have spent trillions on things most profitable for corporations (e.g., military and war), not things most beneficial to them (e.g., infrastructure).     

JMH – 3/1/11

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