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The Reagan Plan

In 1980, when Ronald Reagan was elected president of the United States, interest rates had topped 20% and almost 8 million Americans were out of work. The new president and his advisors believed immediate and bold initiatives were needed to avoid economic catastrophe.   In 1981, President Reagan presented his “Program for Economic Recovery”, highlighted by substantial, across-the-board tax cuts. Though early in the Program, the country entered one of the most serious recessions since the Great Depression, by December, 1982, the Great Expansion was underway.
"Only by reducing the growth of government can we increase the growth of the economy" said President Reagan. A “supply-side” economic theory was the driving force behind his economic plan: massive tax cuts in order to stimulate investments (see Chart 1 Laffer-Curve). The Program had four major policy objectives: (1) reduce the marginal tax rates on income from both labor and capital; (2) reduce the growth of government spending; (3) reduce inflation by controlling the growth of the money supply; and (4) reduce regulation. These major policy changes, in turn, were expected to increase savings and investment, increase economic growth, balance the budget, restore healthy financial markets, and reduce inflation and interest rates.
Although the Reagan Plan did not achieve all the underlying policy objectives, most of the effects of the Plan were favorable and economic conditions unquestionably improved, if not to the extent that the administration had predicted.
The changes to the federal tax code were substantial. The top marginal tax rate on individual income was reduced from 70% to 28%. The corporate income tax rate was reduced from 48% to 34%. Individual tax brackets were indexed for inflation. And most of the poor were exempted from the individual income tax. By lowering tax rates, the incentive for people to hide their money in tax shelters was greatly diminished, leading to more money flowing to financial...