by Mike Kimel
A Post: Tax Burdens, Presidents, and Subsequent Economic Growth – A Few Pictures, Part 1
Last week I had a post looking at the relationship between the change in the tax burden in the first two years of a Presidential administration and the growth of real GDP during the remaining years of the administration. I’ve done variations of this exercise before. It turns out that the more an administration reduced the tax burden in its first two years, the slower the growth the in real GDP over the remainder of its term in office administration. Assuming the result is more than an artifact of the data (and it does seem to correspond with other results I’ve reported here over the years), it requires an explanation. While (I am not happy to report) an increased tax burden might in and of itself stimulate faster economic growth, I suspect a bigger effect is that a) the easiest way to move the tax burden is by increasing or decreasing tax regulation and b) there is a correlation between an administration’s views on tax regulations and its views on other regulations that are intended to prevent externalities. This theory is supported by the fact that the relationship between lower tax burdens and slower growth is strengthened by not including the administrations that served only four rather than eight years makes the relationship stronger.
As I keep noting, one doesn’t have to like the results. I personally would much prefer a world in which lower tax burdens do lead to faster economic growth. But the data doesn’t seem to show that. Still, every time I put up a post like this, I get a lot of flack. One thing people keep telling me is that the results are, at best, a coincidence. In their honor, in today’s post I’m going to describe a few more coincidences that the data shows in my next few posts. Some of these coincidences I expected to see, and some, to be frank, I did not. Today I’m going to stick with a few coincidences I expected.
So… let’s go with coincidence number one. The graph below shows the change in the tax burden from Year 0 (i.e., the last full year of the prior administration) to Year 2 on one axis, and the growth rate in the last full year of each administration. (Only eight year administrations are included.) As an example, for Ronald Reagan, we see the change in the tax burden from 1980 to 1982 along one axis and the percentage change from the 1987 real GDP to the 1988 real GDP.
Notice that the relationship between the tax burden in the first two years of each administration and the growth rate in its last year is extremely strong. That’s consistent with what I wrote in my last post (and so many times before): most administrations do not change their tax policy very much, but tax policy (and other policies that correlate with tax policy) can take a while to have an effect on the economy.
Before I go on, a few ground rules for those who want to comment or send me e-mail:
1. If you really believe that the growth rate in the last year of an administration is “causing” the change in the tax burden in the beginning of the administration, I encourage you to seek psychiatric help. I can’t do anything for you.
2. US’ participation in World War 2 prior to 1940 is best described as peripheral. Growth in 1940, or 1939, or 1934 for that matter, is not due to World War 2.
(If you find my constant repetition of these ground rules funny, hazard a guess as to what creeps into my inbox.)
Now, another coincidence… the next figure shows the the change in the tax burden from Year 0 (i.e., the last full year of the prior administration) to Year 2 on one axis, and the growth rate in the fourth year of each administration.
Again… the picture looks an awful like Figure 1. The fit isn’t as good (consistent with the idea that it takes a while for policy to have a a very strong effect. Kind of odd for a coincidence.
Now… you may be wondering… what about other years. I’ll tell you flat out, the fits in years 1 and 2 are awful… consistent with the idea that it takes a while for policy to have a very strong effect. As to the rest, that will wait for the next post.
To close, nominal and real GDP come from the Bureau of Economic Analysis. GDP was first computed in 1929, so the first complete administration for which we have data is FDR I. Data on the Federal government’s tax receipts comes from the Bureau of Economic Analysis’ NIPA Table 3.2.
As always, if you want my spreadsheets, drop me a line at my first name (mike) period my last name (kimel – with one m only) at gmail period com. I should also point out, you can find a lot more of this sort of analysis in Presimetrics, the book I wrote with Michael Kanell.