Reaganomics Devastated the Economy

Friday, 14 Dec 2012 07:41 AM

By Barry Elias

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During the Reagan presidency, the individual income tax rate fell from 70 percent to 28 percent, while the corporate income tax rate fell from 46 percent to 39 percent, according to the Tax Foundation.

Since the personal rate was lower than the corporate rate, there was less incentive to invest in businesses and more incentive to accumulate personal income, especially for the proprietors.

As a result, investment as a percentage of gross domestic product fell by a third from 22 percent in 1980 to 15 percent in 2010, according to Trading Economics. Based on data from the Federal Reserve Bank, monetary velocity (additional income per unit of spending) fell 50 percent during this time. This decline in the economic multiplier was due to a greater concentration of consumption relative to investment. Less income is generated when spending occurs at the end of the production cycle (consumption), rather than at the beginning (investment).

Since 1980, there has been an extraordinary accumulation of wealth by the top 1 percent, from 20 percent to 35 percent. Emmanuel Saez, an economist at the University of California, Berkeley, estimates the top 1 percent have received 52 percent of the economic growth from 1993 through 2010.

By contrast, real median household income (inflation adjusted) has increased by less than 1/5 of 1 percent since 1980, according to the U.S. Census Bureau.

Based on my previous article, corporate tax rates are currently higher than individual tax rates for all levels of net income.

A healthy economy requires the reverse.

When corporate tax rates are lower than individual tax rates, investment as a percentage of income will rise. This will enable productive and sustainable business development, thereby enhancing economic growth for society — one that benefits the poor, the middle class and even the upper class, since more consumers will be available to purchase products.

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