Lincoln * Institute

Ralph R. Reiland

Ralph R. Reiland

The B. Kenneth Simon Professor of Free Enterprise at Robert Morris University

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Reflections

Tax Cuts and Less Misery

by Ralph R. Reiland
 

Inaugurated as the 40th President of the United States in January 1981, Ronald Reagan inherited the worsening stagflation

of the 1970s, a deteriorating economy with simultaneously escalating unemployment and escalating inflation.

The misery index, the unemployment rate plus the inflation rate, an indicator of how the population is doing economically, with

a higher number signifying larger economic and social costs, increased steadily during the pre-Reagan Carter presidency, reaching a

post-World War II peak of 20.76 in 1980, up from 13.55 in 1977, 13.69 in 1978, and 17.07 in 1979.

In Keynesian economic policy, the trade-off between unemployment and inflation, as illustrated by the Phillips Curve,

shows the cure for joblessness is a growing economy with a negative side effect more inflation while the cure for inflation is a slowing economy

with a negative side effect of more unemployment.

With both inflation and unemployment already at high levels and getting worse, the Keynesian prescription for less inflation and less joblessness is less growth

and more growth, respectively, a contradictory and subsequently unworkable remedy.

Instead, what worked in delivering a strong economic turnaround, replacing high unemployment, high inflation and an elevated misery index with

higher GDP growth, lower joblessness, lower inflation, less poverty and overall greater economic well-being in both the 1960s and 1980s were

the Kennedy and Reagan tax cuts.

Kennedy’s cuts in tax rates, proposed in 1962 and enacted by Congress and signed into law in February 1964, three months after his assassination,

reduced overall income tax rates by 20 percent, dropped the top marginal tax rate on income from an anti-growth and confiscatory rate of 91 percent to 70

percent, cut the tax rates on capital gains and dividends, and reduced the corporate income tax rate from 52 percent to 48 percent.

Coming off a major recession in 1957-1958 with the misery index peaking at 9.57 in 1958, the unemployment/inflation misery index

declined in the first two years of the Kennedy presidency to 7.76 in 1961 and 6.77 in 1962.

Following the enactment of the Kennedy-formulated tax cuts in 1964, the misery index further declined to 6.44 in 1964 and 6.10 in 1965, a lowered and

improved misery index number that was unmatched over the next five decades.

In the same way, the misery index, measuring the combined economic burdens of unemployment and inflation to the population, declined steadily during

Reagan’s presidency, dropping nearly in half from 17.97 in 1981 to 9.57 in 1988.

The improved economic performance and prosperity of the 1980s was launched and strengthened by tax reforms that cut capital

gains taxes, lowered personal income tax rates, cut the corporate income tax rate, and reduced the top marginal tax rate on income from 70 percent to 50 percent in 1981 and to 28 percent in 1986, generating the largest and longest period of wealth creation in U.S. history.

The tripling of the stock market from 1982 to 2000 raised the net wealth of U.S households by approximately $30 trillion, inflation-adjusted median household

income rose by 12 percent in the 1980s, reversing widespread inflation-adjusted income declines in the 1970s, and the American economy overall was

one-third larger by the conclusion of the Reagan presidency in 1989 than at its beginning in 1981.

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Ralph R. Reiland is Associate Professor of Economics Emeritus at Robert Morris University in Pittsburgh.

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Ralph R. Reiland

Phone 412-527-2199

Email: rrreiland@aol.com