12. Link Past and Present In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This bill called for large tax cuts just as the Economic Recovery Act of 1981 had and largely benefited the wealthiest Americans. President Bush’s approach to economics was very similar to that of President Reagan’s. Explain the assumptions behind the theory of supply-side economics, and describe the consequences of Reaganomics. (10 points)

To understand the assumptions behind supply-side economics and the consequences of Reaganomics, let's break it down step by step.

1. Supply-side Economics:
Supply-side economics is an economic theory that emphasizes reducing taxes and removing regulations to stimulate economic growth. According to this theory, if individuals and businesses have more money due to lower taxes, they will be incentivized to save, invest, produce, and innovate, which will ultimately lead to increased economic activity.

Assumptions behind supply-side economics include:

a. Incentives: Lower tax rates will create stronger incentives for people to work, save, and invest.

b. Economic Growth: Increased investment and innovation will lead to higher economic growth rates and overall prosperity in society.

c. Job Creation: With greater economic growth, the theory argues that businesses will expand and create more jobs, leading to lower unemployment rates.

2. Reaganomics:
Reaganomics refers to the economic policies implemented by President Ronald Reagan in the 1980s. These policies were largely based on the principles of supply-side economics. Some key consequences of Reaganomics are:

a. Tax Cuts: Reagan implemented significant tax cuts, most notably through the Economic Recovery Tax Act of 1981. The top marginal income tax rate was reduced from 70% to 50%, and then further lowered to 28% over the course of his presidency.

b. Economic Growth: Reaganomics aimed to stimulate economic growth by reducing taxes. While economic growth did occur during Reagan's presidency, it is debated how much of it was directly caused by his policies.

c. Income Inequality: One of the consequences of Reaganomics was a widening income gap. Critics argue that the tax cuts disproportionately benefited the wealthy, exacerbating income inequality in the United States.

d. Budget Deficits: Despite the promises of supply-side economics that tax cuts would pay for themselves through increased growth, Reaganomics led to significant budget deficits. This was partly due to decreased tax revenue and increased military spending.

e. Deregulation: Reagan also pursued deregulation across various industries, notably in the financial sector. This approach aimed to remove restrictions and boost economic efficiency. However, it also contributed to risky behavior and played a role in the later financial crisis of 2008.

In summary, the assumptions behind supply-side economics suggest that reducing taxes and regulations will incentivize individuals and businesses, leading to economic growth, job creation, and prosperity as seen in the consequences of Reaganomics. However, there are debates about the extent to which these policies were effective and their impact on income inequality and budget deficits.

http://www.econlib.org/library/Enc/SupplySideEconomics.html

http://www.econlib.org/library/Enc1/Reaganomics.html