Related to this tax cut was the second element of
his proposal, that of substantially reducing federal
oversight of corporations and permitting accelerated
depreciation. Reagan reasoned that implementing
this deregulation plan would free corporations from
many complicated bureaucratic rules and regula-
tions that struck him as burdensome and unneces-
sarily restrictive.
The third and probably most controversial ele-
ment of his proposal was to cut drastically the size of
the federal bureaucracy, much of which he consid-
ered wasteful and inefficient. Whereas the economic
policies of his predecessors from Franklin D. Roose-
velt to Jimmy Carter had championed the establish-
ment of government welfare programs and other
stimuli to a sluggish economy, Reagan held an oppo-
site view. He argued for the elimination or severe
reduction of many of the social programs designed
to help the poor, including welfare for dependent
children, institutionalization and custodial care for
the mentally ill, and financial aid for the unem-
ployed. He was convinced that such cuts would re-
duce unemployment and that, although corpora-
tions and the more fortunate members of society
would not be damaged by these cuts, the poor would
eventually benefit as well from what Reagan’s critics
cynically termed the “trickle-down” effect.
Along with all of these mandates, Reagan called
for significantly increased spending on national de-
fense. The contradiction inherent in his proposals,
which many advisers pointed out to Reagan, was
the seeming impossibility of increasing substantially
the money spent on national defense in the face of
the tax reductions the president proposed. Reagan
countered such objections by pointing out that his
policies would make people more productive, would
reduce materially the unemployment rate, and would
result in bringing increased revenue to the federal
government despite the tax reductions.
Reaction to Reagan’s proposals was immediate.
Members of racial minorities raged against what
they considered benefits to the middle and upper
classes at the expense of the less fortunate. The no-
tion of a “trickle-down” effect did little to assuage
their concerns.
The Economic Recovery Tax Act of 1981 On March
30, 1981, two months into his term, Reagan was shot
and almost killed by John Hinckley, Jr. This near-
fatal event and the president’s upbeat attitude fol-
lowing it helped to endear the president to many
Americans who until then had not been supportive
of him. A major increase in his approval rating made
it possible for him to put many of his policies into
effect.
In August, 1981, Congress passed the Economic
Recovery Tax Act of 1981. This legislation reduced
individual and corporate income taxes drastically,
reducing by $33 billion the amount of tax revenue
coming into the government for fiscal 1982. It repre-
sented the largest tax cut in American history.
Even as this legislation was being passed, the
United States slumped into a recession. On one
hand, the recession cooled the raging inflation, but
on the other hand increased the ranks of the unem-
ployed. Many small businesses were forced into bank-
ruptcy. Large reductions in the amount of tax money
coming into federal coffers led inevitably to an alarm-
ing federal deficit.
Looming Federal Budget Deficits By 1982, the
growth of the deficit was so great that Congress was
left with no choice but to raise taxes. With a federal
budget deficit of $110.7 billion in 1982, the tax in-
crease Congress imposed—the largest in the history
of the country—was insufficient. It amounted to $91
billion, resulting in a shortfall of nearly $20 billion.
As early as the fall of 1981, a poll of Americans re-
vealed that more than 60 percent of those ques-
tioned considered themselves in worse condition
economically than they had been during the preced-
ing administration. By 1982, unemployment in the
United States had reached a staggering eleven mil-
lion people, the highest number since 1941.
The economy began to improve rapidly in 1983,
but the federal budget deficit reached another new
high of $195 billion in that year. This was followed by
yet another record-setting deficit in 1984. The defi-
cits run up during the first three years of the Rea-
gan administration exceeded half a trillion dollars.
Distraught presidential economic advisers recom-
mended that the administration cut back on defense
spending as a means of controlling the runaway fed-
eral deficits.
The Cost of Defense Spending In the face of re-
duced tax revenues, the Reagan administration con-
tinued to pour huge sums into defense spending.
Reagan, a staunch anticommunist, noted that the
Soviets were spending 50 percent more than the
United States on defense. Because he was convincedThe Eighties in America Reaganomics 811