## Marginal Rates and Economic Growth: They Go Up Together

With Republicans frantically clinging to discredited ideology and digging in their heels on raising top marginal tax rates, I thought it would be worth revisiting a post from a couple of years ago, showing some excellent long-term evidence that **higher marginal tax rates are not associated with slower growth. Quite the contrary, in fact.** Here you go:

Mike Kimel once again does yeoman’s duty to compare the two:

Tax Rates v. Real GDP Growth Rates, a Scatter Plot | Angry Bear.

In this post commenter Kaleberg adds a very cool scatterplot.

Each dot is a year (t), compared to another year one to four years later (t+1, t+2, etc.).

Bottom axis is the top marginal tax rate in the starting year. Left axis is annual GDP growth over the ensuing one to four years.

Starting years from 1929 to 2008.

With everything trending up and to the right, **it sure looks like higher marginal rates and faster growth go together**. But it’s hard to eyeball these kinds of things, so I pulled correlations. For ending years t+1 through t+4:

0.27 0.28 0.28 0.27

I also dropped in Real GDP/Capita in place of Real GDP. Of course the growth rates are slightly lower — the population (the denominator) was growing. But the graph looks basically the same.

Here are the correlations with marginal tax rate — also lower, but darn close:

0.23 0.23 0.23 0.21

Very consistent.

Short story, there is a statistically significant positive correlation between marginal tax rates in year X and both GDP and GDP-per-capita growth over ensuing years.

It’s pretty small, but consistent and consistently positive – **a higher marginal tax rate in year X correlates with faster growth over the ensuing four years.**

**Especially interesting: **this encompasses a *huge* range of marginal rates — from a low of 28% (’88 through ’90) to highs of 84-94% (1944 to 1963 — when we saw the fastest growth in U.S. history; ’64-’69, the top marginal rate was over 70%).

It’s worth noting that the lowest rate since 1928 was 24% — in 1929.

*Cross-posted at Asymptosis.*

As I am sure someone will point out, correlation does not mean causation, BUT lack of correlation does mean NO causation and lack of correlation is exactly what you have between HIGHER economic growth and LOWER marginal tax rates.

I believe the way to solve the correlation/causation conundrum is to have a compelling narrative. If there is any mathematical way to get to actual iron-clad proof, I’m not aware of it.

Over the years, Mike has cut across this data in many ways – often goaded by dissenting commenters, and it always comes out the same. Higher taxes < -> Higher Growth.

Last month, I presented it this way, which I thought was rather novel.

http://www.angrybearblog.com/2012/10/gdp-growth-caused-by-tax-cuts-has-never.html

I think one can build a compelling narrative around increasing wealth inequality, marginal propensity to consume and stagnating wages over the last four decades.

JzB

I’m certainly not schooled in economics, but since more money in the government coffers generally translates into more spending, wouldn’t it be fairly standard Keynesianism to expect a slightly expanded economy as well?

Hugh -

At some level, spending is spending, so yes, that is fairly standard Keynesianism – BUT — not because of money in the coffers, but because of spending it.

Actually, I believe a Keynesian idea is that tax cuts will also stimulate the economy, because that money will now be spent. But if you drill a level deeper, you have to consider which tax cuts, to whom, and will they actually be spent?

The last few decades have demonstrated that tax cuts on the rich do nothing to stimulate the economy, and strongly suggest a negative effect. Wrong tax cuts, wrong people, money goes to speculation and other non-value-added activities, and increases the skewed distribution of wealth.

JzB