Tax Rates and Growth Rates, Some Graphs

This post includes two graphs I’ve put up in previous posts. One graph is the top marginal income tax rate (data from the IRS), and the other is the real GDP per capita (from BEA NIPA Table 7.1). I’m also adding the annual percentage change in real GDP per capita. I just figured it would be interesting to have it all in the same place. It gives the folks who believe that tax cuts are the end all-be all the opportunity to tell us a story about how tax rates are affecting growth. All I ask from them… be consistent, time only flows in one direction.

Update… the original version of the third graph was annual change by fiscal year. I’ve updated the graph… all three are by calendar year now. Apologies.


BTW… here’s what I’m seeing, to help those who want to tell us a story…

1. the first major cut in taxes seems to be in 1964, and then in 1965. That cut follows several years of increasing growth rates.
2. There’s a tax hike (70% to 75.25%) in LBJ’s last year… coinciding with fast growth. I don’t know when in the year that tax cut happened, but the following year (a year that Nixon also cut taxes) growth rates weren’t too hot, and they were worse the year after that.
3. Nixon had a few good years after his 1971 tax cuts bringing the top marginal rate back to 70%.
4. The next cut was a smidge in Reagan’s first year, and then from 69.5% to 50% in Reagan’s second year. There was a huge jump in real GDP per capita growth the next few years.
5. Reagan’s next two tax cuts – in 1987 and 1988 are accompanied by increases in the annual change in real GDP per capita. The next year, the first year after these tax cuts took effect, 1989, looks awful.
7. The year GHW’s tax hike, 1990, doesn’t look so good. But the tax hike was enacted as part of the Omnibus Budget Reconciliation Act of 1990 – in November (remember, one’s story must have some reasonable causality). The next year, the growth in real GDP per capita went from bad to worse.
8. Clinton also had an Omnibus Budget Reconciliation Act – passed in August of 1993. That year, the growth rate dropped. The next year… it rose. It had another down year, and then stayed up.
9. GW had small cuts in the top rate in 2001 and 2002, and a bigger one in 2003. Growth was negative in 2001, tiny in 2002, and still somewhat small in 2003. 2004 was his best year, and growth rates have been drifting down since.

My best guess… same story I’ve told before… tax cuts may help when tax rates are too high. And they may help in the year immediately following the tax cut, but seem to be unmaintanable. (Presumably we can’t cut tax rates every year to eternity.)

One other thing… as tax rates have drifted lower, we’re also seeing more stability, but slower “fast” years. I suspect that’s more due to the Fed (I’ve had plenty of posts on the real MS growth and real GDP per capita) than tax rates though.