Voodoo Economics

Voodoo economics is a slanderous term used by George Herbert Walker Bush in reference to President Ronald Reagan’s economic policies, which came to be known as “Reaganomics”. Voodoo economics can also be viewed as a derogatory term used to describe the economic process known as supply-side economics, which focus on increasing the supply of goods and services, favoring reduced income and capital gains tax rates.

In theory, higher taxes discourage work and reduce savings.

Voodoo Economics Theory

1. Discourage work - higher taxes reduce the amount of take-home pay after taxes.
2. Reduce savings - the after-tax amount in a savings account is lower when taxes are higher.

Voodoo economics should lead to an increase in labor, employment, and savings (theoretically) because there will be lowering taxes on labor and lowering taxes on savings (in voodoo economics).

1. Lowering taxes on labor
- will lead to more take-home pay (also means that employers can set wages lower because workers will be satisfied by the higher percentage of money they take home after taxes).

2. Lowering taxes on savings (such as capital gains and interest taxes)
- will make saving more attractive (as your money will earn more).

Voodoo Economics

Unfortunately, in practice, the theory had mixed results.

Voodoo Economics is one monetary theory encourage tax laws that favor the rich - the idea being, if the rich had more money, they would invest it (into business), thus creating more jobs.

This is where voodoo economics somehow connected to the trickle-down effect, where money would trickle down to the poor and middle class.

While it sounds good in theory, and while some money does trickle down, the net result is the money stays in the hands of the rich.

Most governments give tax breaks to those in the business quadrant because they provide jobs. (example: beauty salon franchise business creates jobs for the beauty industry)

And government offer tax breaks to the Investors quadrant because they invest their money back into the economy (example: through dynamic asset allocations or providing seed capital funding for business startups).

Special tax breaks are usually given to people who invest in real estate and oil because every country needs housing and energy.

The unintended consequence of voodoo economics was a large increase in the national debt, and the loss of what many consider to be vital social programs as government-funded programs had to be cut in response to the tax cuts.

Branding the system as “voodoo” was an attempt by a candidate to suggest that the theories of supply-side economics were based on magic and imagination, rather than realistic expectations made from solid theory.

In summary, voodoo economics largely revolved around the lowering of taxes to encourage a higher rate of supply.

Voodoo economics may sounds good in theory but as with many other theories and ideas, the reality may be vary from the theory when applying .

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