December 01, 1998

The stock markets performance thus far during the Clinton administration presents a puzzle for supplysiders who argue that tax-rate increases are bad for the economy and the financial markets. Indeed, the data show that despite Clinton's top personal income tax rate hike to 39.6% from 31% (Figure 1), the S&P 500 has increased at a 13.76% annual rate since 1992. Supply-siders find refuge in the fact that the bulk of those gains occurred after the Republicans took control of Congress and moved to keep the nations fiscal house in order. But the experience of the 1980's weakens the supply-side position. Reagan lowered the top marginal tax rate to 28% from 70%. During part of the time those rates were being cut, the Republicans controlled the Senate, and from 1984-1989, the real S&P increased at an annual rate of only 8.26%, 550 basis points lower than the Clinton years.

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