Reagan, for the Record

I’m kind of a Reagan aficionado; I avoid the term “fan”, because I readily acknowledge that there were shortcomings in his term of governance.

At any rate, I wrote a rather long rebuttal to another poster regarding Reagan, so I thought I’d post a standalone version as well. Too much work to get buried:

— — — -

Topic: PATCO and “union busting”

Early in Reagan’s term, while the economy was still in an economic Intensive Care Unit, Reagan was confronted with a threat from the Air Traffic Controller’s union that would have grounded all air traffic, which would have ground a lot of economic activity to a halt. Reagan responded by ordering them back to work under provisions of the Taft-Hartley act, and when they refused, he broke the strike with military air traffic controllers.

First let’s point out that Reagan’s actions were entirely legal. PATCO went on strike; because air traffic was an essential component of a national economy already suffering from high unemployment and high inflation, he legally ordered them back to work under the provisions of the Taft-Hartley act. They refused; he replaced them.

However, the PATCO incident did not involve the weakening of any laws protecting unionism, nor were any new laws passed weakening unions. One can argue that this set a tone which accelerated union demise, and that may be, in some respects, true; however, Reagan did nothing legally to cause that demise to happen, and it is quite easy to argue that he acted rightly by rejecting PATCO’s strike rights under Taft-Hartley.

Topic: Reaganomics. 1st paragraph below written by the original poster:

“Early in his first term, Reagan passed the Economic Recovery Tax Act (ERTA), slashing top tax rates from 70% to 50%, and reducing lower rates as well. No doubt my wife and I benefited, though I do not recall much of an impact. I can assure you that it was much less than the 28.5% reduction in the top rate. Any wealthy person who was actually paying the 70% would have fired their accountant — similarly with the new 50% rate. The media will always talk about the top rate, but that is never the effective rate. The cut was so large that it reduced federal tax intake by 2.9%, leading even a Republican administration to restore half of the cuts in 1986. Shockingly (pause for sarcasm), the highest rate did not go back up.”

I appreciate this largely accurate account of the 1st Reagan package; most commenters today leave out essential facts, allowing readers to assume that somebody actually paid those 70% rates, when of course they did not. Even worse, they accuse Reagan of “cutting taxes on the rich”, which he actually did not do, if you consider the effective rates paid rather than the marginal rates. A plethora of tax shelters were legal at that time which were vigorously used by both the middle and upper classes to lower their AGIs to the point where their effective tax rates were much less. In his tax package, Reagan got removed the shelters, drastically reducing the number of ways the rich could game the tax system.

As far as tax RATES were concerned, this table is key:

Referring to the second table from the top, and comparing the taxes actually paid by the rich (columns 96–99 percentile and/or Top 1%) from 1981 (last year of the high Carter rates) to 1988 (end of Reagan term), you see that there’s very little difference. The rich paid slightly less, but they weren’t making out like bandits under the new law. In fact, I remember many interviews from then where the rich were griping, saying “I voted for this guy because we were supposed to get a tax break. We got chicken feed.” The reason why goes back to the aforementioned tax shelters.

What were those tax shelters? Well, they were investments approved by the government that would act to lower the Adjusted Gross Income (AGI) of the taxpayer. You could invest 10K in an oil well and lower your AGI by 50K. Or you could buy a fractional part of a cow for $1000 and get a break of $5000 (just pulling numbers out of my hat, here — point is that the decrease in the AGI was MUCH larger than the money invested.)

Why oil wells? Why cattle? Well, the idea was that the government could use the threat of high taxes to force richer Americans to put money into investment areas that the government deemed in need of investment. Sounds great in concept, but politicians were using the tax shelters as bargaining chips. If I’m on the committee controlling the tax shelters, I can go to one of my colleagues from Texas whose vote I need and tell him “Vote for my bill or kiss your oil well shelter goodbye”, or something in that vein. At the end of the day, it was a corrupt process that was economically inefficient and benefitted nobody but the rich and their lawyers.

So, Reagan dropped the marginal rates and killed the shelters. Suddenly, all the money that the rich used to stick into these shelters to lower their AGIs, and the money they paid to their attorneys and accountants to manage it all, was burning a hole in their pockets. It needed to do something, so it got stuck into the stock market.

Result? Stocks went wild. (Real estate too, but that’s a longer story.) The rich got a lot richer, but it wasn’t because their tax rates were lowered; it was because they no longer had to pay money to get them lowered, giving them extra dough to play the market with.

Conclusion

The Reagan years were fascinating in a lot of ways, but to understand them, you must first understand the conditions of economic stagflation that preceded them, and the extent to which the public blamed the government for those conditions.

That’s your launch pad. Obviously, there’s a lot more to add, some good, some bad. Deficits took off, the team around him were a corrupt bunch in many ways, and then there was Oliver North gun running from an office down the hall. :-)

Colorful if nothing else. :-)

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Kady M.

Free markets/free minds. Question all narratives. If you think one political party is perfect and the other party is evil, the problem with our politics is you.