The Reagan Tax Cuts and Foreign Policy

During the 1980's President Ronald Reagan's (our 40th president from 1981 to 1989) domestic policy of a substantial tax cut led to greatly increased economic prosperity for our country.  During Reagan's administration marked changes were made to the tax code and economic statistics showed a major change for the better. However, at the same time, the Democrats controlled the Congress and continued increased spending against Reagan's wishes.

The Joint Economic Committee stated that an across-the-board tax cut was not new. In the 20's the Mellon tax cuts were implemented by Secretary of Treasury Andrew Mellon during the Administrations of Hoover, Harding, and Coolidge.  In the 60's Kennedy introduced tax cuts. In both instances the decrease of high marginal tax rates somehow increased tax payments by the rich. Perhaps a foreshadow of things to come.

Debates were raging over the Reagan tax cuts, known as the Economic Recovery Tax Act of 1981 (or, ERTA).  This act was designed to spur savings, investment, work, and economic efficiency.  This policy would impose a 25% across-the-board cut in personal marginal tax rates. In the act of decreasing marginal tax rates, and stimulating economic incentives, ERTA would increase the flow of resources into production, thus lifting economic growth.  This policy received much criticism because its opponents argued that ERTA would be a giveaway to the rich, because their tax payments would collapse. 

Reagan worked hard and skillfully with the congress to obtain legislation to stimulate economic growth and curb inflation, he embarked upon a course to cut taxes and curb inflation. President Reagan was able to sign into law a tax cut in late 1981 even though congressional Democrats tried to block his cuts. All tax payers received these cuts which helped to spur the economy.  The cuts were taken over three years with a 5% cut in 1981, a 10% cut for 1982, and in 1983 another 10% cut.

Reagan's call for extensive changes in the federal income tax laws helped bring about passage of the Tax Reform Act of 1986. In 1986 Reagan introduced the Tax Reform act of 1986. The tax reform act of 1986 chopped taxes, and indexed taxes for inflation as well.  During Reagan's first term the inflation rate was at -5.7%, unemployment was at1.4%, interest rates were at -.7, and the gross national product was 7%.   

Reagan signed the tax reform bill entitled the Tax Reform act of 1986. This act simplified and reduced taxes, but the democrats wanted to claim equal credit for the bill as well. A stock market crash in 1987 raised questions about the nation's economic health. A new bill to balance the federal budget became law in 1987, but the huge deficit continued to be a concern to the government.

Congress passed Reagan's requests for cuts in taxes and in some government programs. Reagan also won increased funds for defense. By 1982, however, the country was in an recession, which meant that there was an extended decline in general business activity, typically three consecutive quarters of falling real gross national product.

 The economy improved in 1983. But the increased defense spending and tax cut had led to a record budget deficit. Democrats attacked Reagan for cutting social welfare programs and called for reduced defense spending and a tax increase in order to lower the deficit.

Foreign Policy

President Reagan through foreign policy sought to achieve peace through strength. He had learned how to deal skillfully with Congress and obtain legislation to strengthen our national defense.

In 1983, Reagan sent U.S. Marines to Lebanon as part of a peacekeeping force. The Marines were recalled in 1984, after some 240 had been killed in a terrorist attack. Reagan also sent U.S. troops to Grenada in 1983, to prevent what the he saw as a Cuban attempt to take over the Caribbean island nation. The President denounced the left-wing Sandinista government of Nicaragua as a threat to peace in Central America, and he repeatedly requested military aid for the anti-Sandinista guerrillas, known as contras. 

In November of 1986 President Reagan confirmed reports that the United States had secretly sold arms to Iran. He stated that the goal was to improve relations with Iran, not to obtain release of U.S. hostages held in the Middle East by terrorists. Later in November, Attorney General Edwin Meese discovered that some of the arms profits had been diverted to aid the Nicaraguan "contra" rebels--at a time when Congress had prohibited such aid. An independent special prosecutor, former federal judge Lawrence E. Walsh, was appointed to investigate the activities of persons involved in the arms sale or contra aid or both, including marine Lt. Col. Oliver North of the National Security Council (NSC) staff. In May 1989 North was tried and convicted of obstructing Congress and unlawfully destroying government documents, but his conviction was subsequently overturned.

Reagan ordered the bombing of military targets in Libya in 1986 in retaliation for its role in international terrorism. His policy of reflagging (flying the U.S. flag on) Kuwaiti oil tankers and providing them with a U.S. naval escort in the Persian Gulf led to clashes with Iran in 1987.

President Reagan during his administration sought to improve relation with the Former Soviet Union, and foreign relations did improve greatly. Reagan and Gorbachev paved the way to the end of the cold war. They accomplished this by means of Summit Conferences.  Several of these conferences were held from 1985 to 1987.  The President and Mr. Gorbachev conducted this summit in Geneva in 1985.

As the result of a U.S. initiative, President Reagan and General Secretary Gorbachev agreed at the November 1985 Geneva Summit to have experts explore the possibility of establishing centers to reduce the risk of nuclear war. The impetus for this initiative grew out of consultations between the Executive Branch and Congress, particularly Senators Sam Nunn and John Warner. U.S. and Soviet experts held informal meetings in Geneva on May 5-6 and August 25, 1986. In October 1986, at their meeting in Reykjavik, President Reagan and General Secretary Gorbachev indicated satisfaction with the progress made at the experts meetings and agreed to begin formal negotiations to establish Nuclear Risk Reduction Centers. Those negotiations were held in Geneva on January 13 and May 3-4, 1987.

The negotiations resulted in the Agreement that was signed in Washington September 15, 1987, by Secretary of State Shultz and Foreign Minister Shevardnadze.

Under the Agreement, which is of unlimited duration, each party agreed to establish a Nuclear Risk Reduction Center in its capital and to establish a special facsimile communications link between these Centers. These Nuclear Risk Reduction Centers became operational on April 1, 1988. The American National Center (known as the NRRC) is located in Washington, DC in the Department of State. The Soviet National Center became the Russian National Center with the dissolution of the Soviet Union and is located in Moscow in the Russian Federation Ministry of Defense.

Reagan's greatest diplomatic achievement was the 1987 treaty with the Soviet Union banning intermediate-range nuclear forces (INF), it was approved by the Senate in 1988. The Iran-contra affair proved embarrassing to the congress. Congressional hearings in 1987 revealed that presidential aides had secretly sold arms to Iran in an effort to free U.S. citizens being held hostage in the Middle East. The aides had then illegally given some of the arms money to contra guerrillas.

Conclusion

The Reagan Tax cuts showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the share of tax payments given by the rich.  With respect to foreign policy Reagan's performances especially with Mikhail Gorbachev showed a high approval of performance with the people. Reagan had the highest poll ratings for performance of any president since World War 2. It appears that his leadership helped to make the feeling of the country to have a more confident outlook on the future.  

References

"Iran-Contra Affair," Microsoft(r) Encarta(r) 96 Encyclopedia 1993-1995.

1996 Grolier Interactive Inc.

Edition copyright (c) 1992 by Houghton Mifflin Company.

http://www.house.gov/joe/welcome.html

http://www.reaganhome.com/taxcuts.html

http://www.theatlantic.com/atlantic/election/connections/foreign/reagrus.htm 

Hyland, W.G., ed., The Reagan Foreign Policy (1987).

The American Heritage(r) Dictionary of the English Language, Third

The Atlantic Monthly, February 1994; Reagan and the Russians; Volume 273.

The Joint Economic Committee reports on the Reagan Tax Cuts