Top Marginal Income Tax Rates & Real Economic Growth, a Bar Chart
by Mike Kimel
Top Marginal Income Tax Rates & Real Economic Growth, a Bar Chart
Cross posted at the Presimetrics blog.
The chart below shows tax rates on one axis and the growth rates in real GDP that accompanied those tax rates on the other:
I broke the tax ranges into 5 percentage point increments centered around intuitive numbers (30%, 35%, etc.). Growth rates are the median observed for each range. For ranges which did not occur in the real world, growth rates are left blank.
Top marginal tax rates come from the IRS’ Statistics of Income Historical Table 23, and are available going back to 1913. Real GDP can be obtained from the BEA’s National Income and Product Accounts Table 1.1.6, and dates back to 1929. Thus, the graph uses data starting in 1929.
Consider this post a quick follow up to my previous post on optimal tax rates that appeared at the Presimetrics blog and Angry Bear blogs. There will be a lot more follow-ups, but it occurs to me that a look a the data might be useful before going on.
I’ve been pondering whether top marginal or effective rate is the right thing to look at. What makes it interesting is that while the top marginal rate has fallen dramatically, from 70% in the 70s to mid 30’s now, the effective tax rates of the upper quintiles have only wiggled a bit. The highest quintile effective rate (income + payroll taxes) has been about 23 +/- 3% since 1979. There is virtually no progressivity within that quintile.
Effective rates dropped for all quintiles after 2000 – accompanied by economic stagnation and no job growth,
On balance, I think looking at the marginal rate makes sense, because that operates on the next dollar made. Currently for the top quintile, that’s mid 30’s vs 20%. Makes a difference to the Fed budget, and to wealth redistribution.
Cheers!
JzB
Agreed JzB. In looking for some additional data on this subject, I came across this, which has the historical income treshholds for various tax brackets: http://www.taxfoundation.org/publications/show/151.html
Looking at 1956, for example there were 24 (!) tax brackets. Relative to the oft-cited $250,000 threshhold, using this: http://www.westegg.com/inflation/infl.cgi
translates to $32,000 in 1956 AGI, which would put the “wealthy” in the 50% bracket. In order to be in the top bracket, the 2009 equivalent AGI is $3.1 million.
Compare the official rates with the effective tax rates for 1979-2006:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
This supports what Jazzbumpa discussed initially.
It’s a mistake to focus solely on marginal tax rates as the entire tax package under consideration or in effect must be considered. Mike Kimel does know this…
MG: “It’s a mistake to focus solely on marginal tax rates as the entire tax package under consideration or in effect must be considered. Mike Kimel does know this… “, but he chooses to ignore it.
Simple solutions for simple problems, but when we try to solve complex problems with simple solutions proves what about the quality of analysis?
What does it prove about the quality of the analysis? Nothing. Solutions and analysis are 2 different things. You are straining mighty hard to make up a fault with Mike’s analysis. Sort of like shoving your fingers in your ears and shouting “I can’t hear you” every time evidence you don’t like is presented.
So there is this trick that creationists use in pretending to debunk evolutionary theory. They identify a gap in the fossil record and say “See that big gap? That means there is no proof that one creature ever evolved from another!” Then, when a fossil from an intermediate form is discovered, creationists shout “Look! TWO GAPS!”
It is always possible to say “it’s more complicated than that.” Even when it isn’t. In fact, things are far more complicated than we need to worry about in many cases, because the complexity of the situation is not an important barrier to reaching our goal. Repeating “it’s more complicated than that” readily can, and often does, serve as a way to deal with evidence contrary to one’s own views.
What makes Kimel’s analysis potentially important is that he’s attached a rudimentary theory to his statistical findings. What seems to be missing is some measurement and analysis of the intervening variables implied by his theory that the TMT rate affects spending/investment behaviors (by those subject to the TMT rate) that in turn affect economic growth rates. He’s probably right but it would be good to know whether it can be demonstrated quantitatively.
KH, you are truly amazing in your ability to add little to a conversation. You did hit on one truism with: “It is always possible to say “it’s more complicated than that.” Even when it isn’t.” after saying this: “What does it prove about the quality of the analysis? Nothing. ”
Nothing?!? Without being able to predict future economic actions from Mike’s analysis, all it proves is coincidence not causation. So, the ball’s in your court to use Mike’s analysis to predict. Or, ofcourse, you can just continue to blow smoke.
harris,
CoRev is right. Mike Kimel, for whatever reason, is now ignoring a large body of his previous work on average effective tax rates.
Those who think the answer rests solely with higher marginal tax rates apparently haven’t studied the effective tax rate data nor the associated federal revenue streams.
It appears that Kimel is taking an intentional shortcut in addressing the issue of revenue flows and GDP growth. For whatever reason.
MG and CoRev –
You guys are rather massively missing the point of this post. There is no anlysis, no model, no expectation of predicive ability from what is presnted here.
It is a look at data. Analysis will probably follow.
The contention that Mike is ignoring previous work, or taking some short of short cut is – and I will be polite – totally without merit.
Mike looks at things form a number of angles, and tries to understand the reality based on various looks at different variables and data sets.
The criticism that comes from you guys would have to be of a much higher quality level before it could even qualify as lame.
CoRev – for you to accuse anyone of adding little to the conversation might be the most unintentinally funny thing I’ve ever seen.
Sheesh!
JzB
JzB, MG and I have been communicating with Mike on this blog for many years. AFAIK, you are a relative new comer with a history of referencing your own blog, snark, and personal attacks, as this last comment was. We have cautioned Dan about AB becoming an echo chamber of commentary such as yours, which significantly lowers the quality of the dialog, as you have done many times over.
jazzbumpa,
You don’t know what you’re talking about regarding Mike’s previous work on effective tax rates. Obviously, you didn’t bother to read his remarks on this point at his blog. let alone review many of olders AB posts.
You’re making a lot false claims here that are pure BS. Your interest in launching small minded personal attacks is typical, but not particularly interesting, factual, or noteworthy.
I haven’t wasted my time challenging Mike’s most recent posts with extensive details. There is no point. We argued about the differences between focusing on marginal tax rates and average effective tax rates a number of threads back. He has changed his thinking and focused his energy on marginal tax rates. I happen to disagree based on relevant tax analysis that is readily available. It’s a simple fact that marginal tax rates can be reduced and average effective tax rates can increase at the same time. I am not impressed with a sole focus on marginal tax rates.
I expect Mike’s posts may change later on after he is finished with promoting his book sales. We’ll see.
jazzbumpa,
You don’t know what you’re talking about regarding Mike’s previous work on effective tax rates. Obviously, you didn’t bother to read his remarks on this point at his blog. let alone review many of Mike’s olders AB posts.
You’re making a lot false claims here as well as spouting pure BS. Your interest in launching small minded personal attacks is typical, but not particularly interesting, factual, or noteworthy.
I haven’t wasted my time challenging Mike’s most recent posts with extensive details. There is no point. We argued about the differences between focusing on marginal tax rates and average effective tax rates a number of threads back. He has changed his thinking and focused his energy on marginal tax rates. I happen to disagree based on relevant tax analysis that is readily available. It’s a simple fact that marginal tax rates can be reduced and average effective tax rates can increase at the same time. I am not impressed with a sole focus on marginal tax rates.
I expect Mike’s posts may change later on after he is finished with promoting his book sales. We’ll see.
“Consider this post a quick follow up to my previous post on optimal tax rates that appeared at the Presimetrics blog and Angry Bear blogs. There will be a lot more follow-ups, but it occurs to me that a look a the data might be useful before going on.”
This is what you call “ignoring”? Nonsense. In this post and the one that preceded it, Mike said that there is more to come. Based on what Mike has said is “a quick follow-up” for which there will be “lots more follow-ups”, you declare that he is “taking an intentional short cut”. Well, yes, that’s what he said he’s doing. But, instead of taking him at his word regarding the reason for his short cut, you give us the old “for whatever reason” twice – the reason is obvious – and then engage in ad homenim – book sales.
You engage in that sort of nonsense, and you call Mike’s motives into question?
CoRev,
You have been communicating with Mike on this blog for years. And given the record of that communication, to suggest that anyone else here lowers the level of dialog in which you engage is simply laughable. Your a right-wing troll. Of course you have “cautioned Dan and AB about allowing people who disagree with you a voice here. The whole business of people like you and your political masters is to silence view other than your own. You have demonstrated that you will say anything, make any claim, ignore any evidence and distort any statement in service of your agenda. Jazz has a point of view, but he is nowhere near the depths at which you seem to live.
CoRev,
Good of you to admit to your crimes right here in public. It is pretty obvious that your assigned task is to disrupt any discussion that does not serve your agenda, but here you are on record saying as much. You also admitted to being a tea-bagger activist, and the family resemblence is clear. Shouting down those who differ with them is SOP for baggers. Flooding comment sections with propaganda is more or less the internet equivalent of shouting.
CoRev:
Communication??? that is laughable coming from the master of redundancy and inability to absorb what is being offered. KHarris has it right, you are a master of the finger in each ear and “I can’t hear you” approach which is typical of the Neocons and Teabaggers who refuse to have any dialogue.
You “have cautioned Dan about AB becoming an echo chamber of commentary such as yours???” Such a statement by you provokes a belly-buster of laughter. Who do you believe you are to comment on censuring by Angry Bear when in your own reaction to ideas and thought by others you have expressed strong disapproval of any counter. The only thing which keeps you here is Dan’s practice of avoding the tyranny of the majority.
“Protection, therefore, against the tyranny of the magistrate is not enough; there needs protection also against the tyranny of the prevailing opinion and feeling, against the tendency of society to impose, by other means than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them; to fetter the development and, if possible, prevent the formation of any individuality not in harmony with its ways, and compel all characters to fashion themselves upon the model of its own.“
You have caused no harm to others physically; but, your constant attacks to silence others is little more than an attempt to suppress what others might have to say and is therefore dangerous to others who may have a minority opinion.
MG:
You are better than this.
run,
I stated simple facts. Mike’s overall record speaks for itself. This latest sole focus on marginal tax rates, ignoring the cumulative effect of average effective tax rates, doesn’t make any sense. Try reading Treasury’s Green Book and you will learn quickly that it’s the overall tax package that matters. The tax law info and tax revenue data are available. There is no mystery about what has occurred.
Here’s a thought to ponder:
What if there is no such thing as a “marginal tax rate?” People seem to think you can figure out someone’s marginal tax rate simply by going to the IRS’s web site and downloading it. Sure, all other things being equal, a person will have better incentives to work if his marginal tax rate is lower (assuming his average tax rate stays the same or increases, since a lower average tax rate actually reduces a person’s incentive to work). But all other things are never equal. No one knows if you would make that kind of money if there were no tax rate or not. It’s a complete counterfactual. Lowering someone’s tax rate sets off a cascade of events that over the long run are unpredictable.
Economists would go a long way to improving their profession if they employed skepticism and stopped taking sides (and came up with more rigorously applied theories).