Today, Republicans extol the virtues of lowering marginal tax rates, citing as their model the Tax Reform Act of 1986, which lowered the top individual income tax rate to just 28 percent from 50 percent, and the corporate tax rate to 34 percent from 46 percent. What follows, they say, would be an economic boon. Indeed, textbook tax theory says that lowering marginal tax rates while holding revenue constant unambiguously raises growth.
But there is no evidence showing a boost in growth from the 1986 act. The economy remained on the same track, with huge stock market crashes — 1987’s “Black Monday,” 1989’s Friday the 13th “mini-crash” and a recession beginning in 1990. Real wages fell.