The second pillar of Reagan's economic policy (Reaganomics) was to reduce the federal income and capital gains taxes. The first was reduce the growth of government spending. The third pillar was reduced government regulation, and the fourth pillar was reducing inflation by tightening the money supply. In 1981, Ronald Reagan signed the Economic Recovery Tax Act of 1981. The act modified the Internal Revenue Code to encourage economic growth through reduced individual tax rates and to provide incentives to small business and for savings. The act reduced income tax rates across the board by 23% over three years. The top tax rate fell from 70% to 50%, while the bottom rate dropped from 14% to 11%. There were many concerns that reducing the tax rates would hamper the government's ability to balance their budget, so Ronald Reagan addressed this head-on in his first state of the union address:
"Higher taxes would not mean lower deficits. If they did, how would we explain that tax revenues more than doubled just since 1976; yet in that same 6-year period we ran the largest series of deficits in our history. In 1980 tax revenues increased by $54 billion, and in 1980 we had one of our all-time biggest deficits. Raising taxes won't balance the budget; it will encourage more government spending and less private investment. Raising taxes will slow economic growth, reduce production, and destroy future jobs, making it more difficult for those without jobs to find them and more likely that those who now have jobs could lose them. So, I will not ask you to try to balance the budget on the backs of the American taxpayers."Interestingly lowering the top tax rate, did not reduce the percentage of revenue collected from the wealthy. By 1988 with the lower top tax rates firmly in place, the tax burden borne by the top tax payers actually increased from 48% in 1981 to 57% in 1988, while the share of the bottom 50% of tax payers dropped from 7.5% to 5.7%.
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