This paper evaluates the quantitative welfare effects of taxation reform for the case study of President Reagan, which is referred to in literature under the heading of “supply-side” economics. We apply modern macroeconomic techniques to a significant historical fiscal reform. The added unique element of Lucas’s human capital makes this paper different to current papers on the topic of supply-side economics. Such unprecedented levels of reform in the United States has lacked much needed quantitative analysis. Focusing on capital gains and income taxation only, consumption expenditure is used as a proxy for welfare. Using a dynamic general equilibrium model, reforms to income tax were found to have increased consumption by 6.3% using compensating variation techniques. Capital gains tax reform were found to have had a positive effect on consumption by 1.9%. The research also highlighted the distortionary effects of taxation, especially of that on income tax, mainly through the accumulation of capital, supply of labour and distribution of income. This research has important implications for current policy and how policy makers view taxation as an effective policy tool.
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