The Tax Cut That Never Was

Finally! Prof. Mishra has offered some evidence to support his argument. Granted, it’s not accurate evidence, but at least he’s trying.

Here’s the example that Prof. Mishra thinks is evidence of tax cuts increasing tax revenue:

Indeed, in 1986, when President Reagan lowered the top tax bracket from 50 percent to 28 percent, it led to an enormous rise in federal tax revenues as well as a great expansion in small business and entrepreneurial activities, leading to more job creation and economic growth.

Well, that’s one way to rewrite history.

As I’ve said over and over, the business cycle that Reagan presided over experienced the exact same economic growth — 3 percent per year — as the one overseen by Nixon, Ford, and Carter. And since tax cuts supposedly increase tax revenues by increasing economic growth, the entire argument falls apart because they didn’t increase economic growth.

But what makes Prof. Mishra’s example really embarrassing is that the Tax Reform Act of 1986 was a tax increase, not a tax cut!

As I’ve also said over and over and over, what really matters is effective tax rates — that is, what people actually pay — not statutory tax rates. Because the Tax Reform Act of 1986 eliminated so many loopholes and raised capital gains taxes from 20 percent to 28 percent, it actually forced people in the top tax bracket to pay higher taxes.

In 1986, before the Tax Reform Act took effect, the top quintile of taxpayers paid an effective federal tax rate of 23.8 percent. In 1987, after the Tax Reform Act, they paid 25.8 percent.

In 1986, the top 1 percent of taxpayers paid an effective federal tax rate of 25.5 percent. In 1987, they paid 31.2 percent!

So there you have it: Prof. Mishra has finally admitted that tax increases on the rich “led to an enormous rise in federal tax revenues as well as a great expansion in small business and entrepreneurial activities, leading to more job creation and economic growth.” He just doesn’t know it.