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Reaganomics—the Grand Illusion

At the heart of Reaganomics was the advancement of lower taxes for the rich (both income-tax and capital gains tax), deregulation, and small government. On taxes, the main assumption was that the rich would use the money to create jobs and expand production, and for forty years this has been the holy grail of economic conservatism. But there is no evidence that it works.

For starters, the Reagan tax cut failed to pay for itself and the administration was eventually forced to find other ways to tax people to make up for the shortfall in revenue (read THIS). Then the federal deficit exploded, in large part because of Reagan’s massive military buildup and growing foreign commitments, adding billions to the national debt (read THIS and THIS). This is a peculiar contradiction that debunks fiscal conservatism and its knack for austerity.

Yes, lower taxes do put money in people’s pockets, but the thing is once the money is spent, the impact on economic growth is not significant enough to raise the standard of living for most of the population. And when it comes to the rich, the rich don’t create jobs (read THIS). The so called trickle-down effect is basically a lie. What does create jobs is a just economic system that looks after its people and makes sure they get decent wage.

A recent IMF study concluded that tax cuts actually increase economic inequality because more often than not they favor those with assets and equity. Moreover, tax cuts have a negative effect because they instantly reduce the federal budget, leading to drastic cuts in social programs. And in the case of Reagan, whatever gains were made by cutting social programs, they were soon offset by huge increases in military spending. But this is what fiscal conservatives keep doing over and over again expecting a different result.



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