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Voodoo Economics

Updated on April 22, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Voodoo Economics?

Voodoo economics, popularly used by George H. W. Bush, derogatorily refers to an economic policy followed by President Ronald Reagan that aimed at reducing government spending, taxes on income and capital gains, and controlling money supply in the market to reduce inflation to improve the economy of the country.

Key Takeaways

  1. Voodoo economics describes President Ronald Reagan’s economic strategy to enhance the nation’s economy by cutting government expenditure, raising income and capital gains taxes, and managing the market’s money supply.
  2. The US tax system was simplified by decreasing the tax rates for the top earners from 70% to 28% and the corporation tax rate from 48% to 34% through voodoo economics.
  3. Due to the strengthening of the US dollar, investors worldwide have begun to express interest in participating in the US stock market.

Explanation

Voodoo economics, popularly used by George H. W. Bush, derogatorily refers to an economic policy followed by President Ronald Reagan that aimed at reducing government spending, taxes on income and capital gains, and controlling money supply in the market to reduce inflation to improve the economy of the country.

The main aim of the policy was to reduce inflation, simplify taxation, reduce regulations, and reduce government spending so that people were encouraged to invest and save money. After its implementation, this policy worked and showed improvement in the GDP of the US and resulted in the generation of employment opportunities, which resulted in improved economic conditions.

Voodoo Economics Explained

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How does Voodoo Economics Work?

There were four pillars of Voodoo Economic which are

  1. Simplifying Tax System
  2. Reduce Governmental Spending
  3. Reduce Regulations
  4. Reduce Inflation

Through the voodoo economic policies, the taxation system of the US was simplified by reducing the tax rates for the highest-earning group from 70% to 28% and by lowering corporate taxes from 48% to 34%. Also, by amending the exemption criteria for poor and low-income people, by increasing the rate of excise duties and eliminating deductions from income, people started saving and investing more due to saving from reduced tax rates. This improved the money supply in the market, economic conditions, and standard of living started improving, which resulted in higher GDP of the nation.

As far as government expenditures were concerned, unwanted social spending was reduced, which was diversified towards defense and military expenditures. Still, due to huge defense expenditure, the nation’s debt increased for the short term. Also, the US got the benefit of spending huge on military and defense, due to which it became one of the strongest countries of the world with the latest and high power technology and strong and well trained military force.

  • Due to reduced regulation, imports have decreased, and exports have increased considerably.
  • Overall, inflation was reduced due to voodoo economic policies as the money supply increased, resulting in improvement in investments and growth of the share market.
  • Hence, the overall result of voodoo economics has been positive as people’s standard of living increased, unemployment decreased, and economic conditions improved. It also decreased inequalities of incomeInequalities Of IncomeIncome inequality refers to the crucial imbalance of income dispersal across the population.read more as it exempted certain classes of people from paying taxes.
  • Due to the Voodoo economy, the currency of the US has become strong, and investors around the world have started showing interest in investing in the US stock market.

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Examples

Before the Presidency of Mr. Ronald Reagan, the US economy was not so good, and inflation was very high. Mr. Ronald Reagan introduced the Voodoo economic policies, which are aimed at controlling inflation and improving the economic conditions and GDP of the nation.

As in voodoo economic policies, governmental spending controlled, income tax got simplified, deregulation of policies was made, and inflation was reduced, and this resulted in improved economic conditions, which can be understood from the following example:

XYZ Ltd., a US-based company liable to pay tax around 48% before the Presidentship of Ronald Regan, but after voodoo economic policies got introduced and implemented by which the tax system was simplified, this resulted in a reduction of the tax rate on XYZ Ltd from 48% to 34%.

So earlier, XYZ ltd was liable to pay, for example, $48,000 of tax on the income of $ 100,000. Still, now after Voodoo’s economic policies, it is liable to pay $ 34,000, i.e., saving in tax around $ 14,000. XYZ spent this savings on the expansion of the company for which it employed 50 new employees, which resulted in employment generation in the US. So now, as employment opportunities increase, people’s standard of living and spending power start improving, and eventually, GDP increases.

And Mr. A, one of the largest investors, has noticed that price shares of XYZ Ltd. are increasing day by day in the US Stock market. He started investing in XYZ Ltd in the US Stock market, from which he earned a decent return on investment, which benefited Mr. A, and XYZ Ltd both as Mr. A earned a decent return on investmentReturn On InvestmentThe calculating of investment return is the fundamental mathematical and financial approach to analyze the amount or percentage an investor may receive based on the amount invested at that time.read more. The XYZ Ltd got the global recognition and interest of foreign investors.

Conclusion

And Mr. A, one of the largest investors, has noticed that price shares of XYZ Ltd. are increasing day by day in the US Stock market. He started investing in XYZ Ltd in the US Stock market, from which he earned a decent return on investment, which benefited Mr. A, and XYZ Ltd both as Mr. A earned a decent

People’s spending power increased due to savings in taxes, and the overall economy started improving. Proper channelization of Governmental Spending resulted in the US being one of the strongest nations in terms of military. De-regularization resulted in increased exports and a decrease in imports, and reduced inflation resulted in improved money flow. The policies are praised by the overall world and make the US one of the largest economies.

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