Find out how the 1981 Reagan Tax Cuts brought huge dramatic changes to the tax system and economic growth, and see how similar it is to this year’s tax reform and how it will affect the taxpayers.
What You Need to Know About Reagan Tax Cuts
Economic Growth Result of the 1981 Reagan Tax Cuts
The Reagan Tax Cut, also known as The Economy Recovery Tax Act of 1981, was huge during the 1980s. The provision aimed a 23% cut in individual income tax rates over three years. This brought the high marginal tax rates — the highest ever — from 70% to 50%. At the time, the inflation rate was nearly 10%.
Accordingly, the tax cut wasn’t able to pay for itself. The Reagan administration thought the spending cuts did not materialize. While the recession ended during that time, it is believed that the monetary policy concluded it, not the tax provisions. In fact, that time, the federal reserves went down by about 9% in the first two years since its regulation.
Effects of This Tax Cut to Individuals and Businesses
The tax cut was so huge that it hugely increased the national debt and blew up budget deficits. As a result, with Reagan’s signature, Congress had to undo the tax cut by increasing tax rates from 1982 through 1987 for economic recovery. Shortly after, George H.W. Bush and Bill Clinton had to do the same in 1990 and 1993, respectively. It has been learned from this tax history that tax cuts are extremely challenging to sustain and often implies future massive increase in taxes.
The Economic Situation During the 1980’s
During 1982, the unemployment rate rose above 10% and the Federal Reserves war on inflation increased interest rates to nearly 20% which caused a severe recession. The cuts in taxes have undoubtedly contributed to the blow of the economy then. The huge increases in federal spending helped curb inflation resulting in an increase in federal interests making it more expensive to borrow funds. Revenues and jobs, on the other hand, also increased, contributing to the advantage of this tax bill. However, the dramatic changes and economic facts during the 1980’s revealed that many business tax breaks in the 1981 bill didn’t survive making it harder to realize if the provision really helped.
Tax Reform Act of 1986 Comparison
The 1986 Tax Reform Act is hard to compare from the Reagan tax cuts and even with the 2018 Tax Reform. The 1986 law was formed in Congress with a bipartisan support and developed by tax experts for a few years. It was different and huge that no tax reform was made for the past three decades. This year’s tax reform focuses on improving the tax codes that aim to raise more money than the previous tax reform.
Is the Reagan Tax Reform 1981 Effective?
Whether The Economy Recovery Tax Act of 1981 really spurred an economic recovery or not is hard to tell. Surely, it improved some of the tax codes and increased the jobs and revenues of people but tax expert, Alan Auerbach said that the tax reform was, in fact, a good idea but offered a comprehensive attempt in improving the tax system.
Tax reforms are aimed to improve tax systems and boost economic growth at the same time. And while provisions may look enticing at first glance, the effects can only be best evaluated within years of implementation. The previous tax acts have proven this and we can only hope for the best with this year’s tax reform.
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