To that end, the Economic Recovery Tax Act of 1981 reduced the marginal tax rate from 70 percent to 50 percent. From the beginning, President Reagan and his team recognized the tax cuts would not pay for themselves, but they anticipated spending cuts would help balance everything out. Typically, the spending cuts never came.
But even back then – with an economy that had negative markers across the board – supply-side economics didn’t work as advertised. Soon after the 1981 tax cut, federal revenues dropped like a rock and the federal deficit blew out, making it clear the tax reduction was too aggressive.
Even so, five years later, President Reagan signed the Tax Reform Act of 1986, bipartisan legislation with the stated goal of “fairness, simplicity and economic growth.” This law reduced the marginal income tax rate from 50 percent to 28 percent and reduced the corporate tax rate from 46 percent to 34 percent.
But this didn’t really have an impact either. As Bruce Bartlett – a domestic policy adviser to President Reagan and one of the architects of the Economic Recovery Tax Act of 1981 – explains:
“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 said, 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.
Strenuous efforts by economists to find any growth effect from the 1986 act have failed to find much. The most thorough analysis, by economists Alan Auerbach and Joel Slemrod, found only a shifting of income due to tax reform, no growth effects: ‘The aggregate values of labor supply and saving apparently responded very little,’ they concluded.”
Here is more of what Auerbach and Slemrod had to say:
“Of course, saying that a decade of analysis has not taught us much about whether the Tax Reform Act of 1986 was a good idea is not at all the same as saying it was not in fact a good idea. We think it was. The theoretical case remains valid for a tax system with a broad and clean base which minimizes the reward to tax-driven economic activity. Advocates of this kind of tax system will, however, be frustrated that a retrospective analysis of the most comprehensive attempt in history to achieve this goal offers little hard evidence of the fruits of this effort.”
In the end, President Reagan and Congress had to raise taxes in 1982 (a rollback of some of the 1981 tax cuts), 1983 (a payroll tax on Social Security and Medicare), 1984 (a closure of tax loopholes) and 1987 (a closure of more loopholes and an extension of a telephone excise tax). President George H.W. Bush was forced to raise taxes again in 1990 – violating his “read my lips, no new taxes” campaign pledge, which cost him a second term – as was President Bill Clinton in 1993.
So – after all the smoke cleared – the tax legislation passed in 1982 and 1984 “constituted the biggest tax increase ever enacted during peacetime.” Tax historian Joseph Thorndike explained it this way, “Reagan was certainly a tax cutter legislatively, emotionally and ideologically. But for a variety of political reasons, it was hard for him to ignore the cost of his tax cuts.”
… which is why, in his farewell address to the nation, President Reagan said, “I’ve been asked if I have any regrets. Well, I do. The deficit is one.”