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.

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