What is MacroWeb?

In the late 1970s and early 1980s, the U.S. economy was ailing. During this period of time, the term stagflation was coined to describe the combination of stagnation and inflation that were being experienced. The unemployment rate was 7.7% and inflation was hovering somewhere around 13%.

In 1981, President Reagan took office with the focus of restoring the economy, primarily with the promise of cutting taxes in order to spur growth. Tax cuts were backed by a new breed of economic thought that became prevalent at the time called supply-side economics, which reasoned that high tax rates were stifling the economy by decreasing incentives for people to earn, invest, and save more. This argument was further supported by Arthur Laffer who showed with the Laffer Curve that a tax cut might sometimes yield more government revenues.

President Reagan soon collaborated with Congressman Jack Kemp of New York and Senator William Roth of Delaware, who had introduced earlier an idea for cutting the marginal income tax rate, to pass the Reagan Kemp-Roth tax bill or, officially, The Economic Recovery Tax Act of 1981 (ERTA). The tax bill involved cutting the maximum marginal income tax rate from 70% to 50% effective January 1, 1982. Individual marginal tax rates were than reduced by 25% across the board over a 4 year span. The reduction was phased as follows: 1.25% for 1981, 10% for 1982, 19% for 1983, and the full 25% coming in 1984.

The Reagan Kemp-Roth tax rate cut along with contractionary monetary policy utilized to combat inflation sparked a boom in the economy that lasted throughout the rest of the decade. For the remainder of the decade, the economy grew on average of about 3% with declines in both inflation and unemployment and a dramatic increase in the value of the stock market.

Who is Dave Tufte?

Copyright, Colton Peterson, 2002.