Reagan Showed it Can Be Done: Lower the Top Rate to 28 Percent and Raise More Revenue

To put it mildly, many in the press and in the public remain unconvinced that Romney can lower tax rates without lowering revenue. Ruth Marcus at the Washington Post writes that Romney’s plan:

“hinges on the faith-based assertion that this revenue neutrality can be achieved through the ensuing miracle of faster economic growth. History counsels against counting on tax miracles.”

Well, Reagan counted on just such a miracle, and he got it. So did Kennedy. Let’s look at the Reagan years, since it provides the closest example of what Romney would do, i.e. lower the top marginal income tax rate to 28 percent. As the chart below shows, Reagan lowered the top marginal income tax rate from 70 percent in 1980 to 28 percent in 1988. Individual income tax revenue increased, even after adjusting for inflation and population growth.

How did Reagan do it? In much the same way that Romney has said he would: by eliminating tax preferences. In neither of his campaigns did Reagan specify which tax preferences he would eliminate, and nor has Romney. Reagan left the details to his Treasury Department and Congress.

Now, Romney would maintain a lower tax rate on capital gains and dividends than Reagan did, but again the historical record provides no evidence that higher tax rates on investment income produce more revenue. The following chart shows that when the capital gains tax rate was high, from 1987 to 1996, revenue was low.

See this report for more on the Romney tax plan. Ruth Marcus relies on the Congressional Research Service to support her claim, but that analysis is extremely misleading, as explained here.

Follow William McBride on Twitter @EconWill