You’ve probably heard of Voodoo economics, but may not understand exactly what they are or how to put them to use for your benefit. As we know now, voodoo is cool; without voodoo there’d be no zombies. But the 1980s was a zombie-deprived decade and people actually used the term “economic voodoo” to disparage Ronald Reagan’s concept that business growth could get rid of the inflation, stagnation, and malaise, which all seemed intractable in the late 1970s.
Specifically, Reagan believed that high taxes reduce people’s desire to work hard since they don’t get to keep much of the money they earn. In 1980 the top income tax rate was 70%. Make 100 bucks, take home 30. Bummer, dude! And if you were thinking of risking your money or taking on debt to start a business… Forget about it, because, like, where’s the upside?
Ronald Reagan’s suggested solution was to cut the tax rate to 28%. People went bananas. Say the economy was producing $1000 in annual revenue. Of course not everybody was paying at the top 70% rate, but for simplicity’s sake, let’s say the government of the USA was used to taking in $700 in revenue and spending it. Now, under Reagan’s plan, they’d only be getting $280. No way José.
With his characteristic good humor, Reagan responded that people would respond to incentives, which would unleash their (economic) animal spirits, so that the top line revenue number would increase well above $1000. In this dynamic scenario, the smaller percentage tax rate, times a dramatically expanded annual GDP, would produce more or less the same amount of money in tax receipts.
So there’s your voodoo: People pooh-poohed the idea that the economy could grow enough to make up for the lower percentage rate. Only a dimwit, a charlatan, a mere actor—they stated with conviction—would spout such rubbish.
Here’s how it turned out.
In 1980, when Ronald Reagan was elected, the top rate was 69.125% and the IRS received $308.7 billion from taxpayers. By 1990, the top rate was 28% and IRS revenues were $560.0 billion.
Some voodoo. Maybe they should have called it mojo economics.
But who supplied the mojo? The Boomers, obviously. Remember what I told you in the Second Epistle: It’s always about the Boomer.