Ronald Reagan, Keynesian

by Russ Roberts on July 28, 2004

in Politics, The Economy

Who knew? I always thought he was more of a monetarist supply-sider. But check out Harold Meyerson’s piece in today’s Washington Post:

Under Reagan, and now far more so under George W. Bush, the official policy of the U.S. government has been to throw money at the rich. When Reagan ruled, this policy was justified by the doctrine of trickle-down economics: The rich would invest their tax cuts in job-creating American enterprises.

Did this dotty theory work? Not according to Meyerson:

The theory sounded a lot better than the actual process worked, but at least there was a theory. Under the latter Bush, there’s not even that. When the rich invest today, their money flows to enterprises that span the globe. Trickle-down economics is gone; what we have today is trickle-out economics.

Ironically, Bush actually usually uses a Keynesian argument to justify his tax cuts. (My take on that weird argument and the Keynesian stimulus idea is here.) But I don’t remember that being Reagan’s justification. Reagan actually thought his tax cuts changed incentives rather than giving people money to spend in useful ways. Did the Reagan tax cuts work? There were a lot of jobs created in the 80s. Not sure what Meyerson means by the process not working out very well. But the deeper issue is that tax reform is a mess because of the goofy way we pay for government with a combination of an income tax and a payroll tax. The rich pay the overwhelming share of the income taxes, so if you cut income taxes across the board by equal percentages, the rich will get a bigger tax break. What you really want to do is cut payroll taxes at the same time. But payroll taxes allegedly fund social security and we all know social security is broke, so cutting payroll taxes is ireesponsible.

The truth is that payroll taxes fund government spending generally. We ought to eliminate the ruse that payroll taxes fund social security, eliminate the payroll tax and roll it into the income tax. Then we could give the middle class a better tax cut than they get now.

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