by Mike Kimel
Four Graphs Looking at Real Economic Growth
This post contains four graphs looking at real economic growth, three of which also contain some tax information.
The first graph shows the five year annualized growth in real GDP for every five year period beginning the one ending in 1934. (I begin then simply because data on real GDP is only available from the BEA beginning in 1929.)
I took the liberty of adding in two lines free-style. The first is my attempt to trace the high points over time, leaving out WW2. The second traces the low points, assuming the collapse from 1929 to 1932 and the post-WW2 drop are special cases. (That huge dip from 1945 to 1950, economic shrinkage and all, is what libertarian professors like David R. Henderson keep referring to inexplicably as a post-war miracle.) Those ad hoc lines seem to indicate that any “Great Moderation” in the economy – whether it began in the 1980s or earlier – is more due to a slowing down of the rapid periods of growth than to a reduction in the severity of downturns. Put another way… the Great Moderation = the Great Suckening (for readers who aren’t economists, that’s a technical term like “sterilizing monetary policy” or heteroscedasticity).
Figure 2 is similar to Figure 1, but it strips out the two ad hoc lines and adds in the five year average top marginal individual income tax rate.
As Figure 2 shows, there doesn’t seem to be much of a relationship between the average top marginal tax rate in any five year period and the annualized growth in real GDP over that same period, and certainly there’s no sign from this graph that higher tax rates discourage economic growth. The fact that the correlation between the two series is positive indicates that if anything, in general real economic growth rates have tended to be higher when tax rates were higher.
Figure 3 is a scatter-plot version of the data in Figure 2.
Notice that it kind of looks like you can put a quadratic curve to these points – at “low” tax rates, increasing tax rates are associated with faster economic growth. Only at very “high” tax rates – somewhere north of 70% or 80% – does it appear that reducing tax rates are associated with faster economic growth. Reminiscent of this graph, dontcha think? Another thing that’s noticeable… the greater variability in growth that accompanies higher tax rates, which was also visible from Figure 2.
Finally, Figure 4 is the same as Figure 3, but rescaled to leave out 1942-1945, which only makes the lack of a lower taxes = faster economic growth relationship more obvious.
As always, if you want a copy of the spreadsheet where these graphs were produced, drop me a line. I’m at mike period my last name (that is “kimel” – one m only!) at gmail period com.
Cross posted at the Presimetrics blog.