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102 IRET Policy Bulletin 1 (2011)

handle is hein.taxfoundation/iretpbul0061 and id is 1 raw text is: November 11, 2011 No. 102 THE REAGAN ERA TAX POLICIES Introduction This paper estimates the effect of the Reagan era tax policies of the 1980s on the U.S. economy and the federal budget. It examines the differing policy objectives and economic outcomes of the early Reagan tax rate reductions and the later tax reform efforts. The tax rate reductions of the early Reagan years were aimed at restoring economic growth and producing a tax system that weighed less heavily on saving and capital formation than prior law. By and large, they were successful once they were fully implemented. (See Chart 1.) The tax reform of the second Reagan administration marked a return to the policies of the traditional public finance community, moving back toward the broad-based income tax, which favors consumption over saving and investment. That reform altered the tax base and effectively raised taxes on capital formation even as it lowered statutory marginal tax rates on individuals and corporations. The economy was not as strong after the shift in policy. (See Chart 1.) These alternative approaches to taxation had Chart 1 Changes In GDP Due to Tax Changes significantly different in the First and Second Reagan Administrations economic consequences. 12% The experience of the 10% 10.2% 1980s offers useful guidance for dealing with 8% - the current federal deficit 6% - and related tax reform proposals intended to be a 4% - part of the deficit fix. In particular, it is a warning against current efforts to 0% mimic the Tax Reform -2%-0.9% Act of 1986 as a response First Term Second Term (TRA86) to the federal budget gap. Source: Calculations by author Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote economic growth and efficient operation of the market economy. on the Economics of 1710 Rhode Island Avenue, N.W., 11th Floor • Washington, D.C. 20036 Taxation (202) 463-1400 • Fax (202) 463-6199 • Internet www.iret.org