High Marginal Tax Rates are Associated with High GDP Growth
After hinting at it for months, I can finally post the abstract of and a link to
“Top Marginal Taxation and Economic Growth”
by my student Santo Milasi
The paper explores the relationship between statutory top marginal tax rates on personal income and long-run economic growth. While theoretical models of endogenous growth explicitly allow for nonlinear effects of taxation on economic growth, the majority of existing empirical studies assume a linear association. By contrast, this paper investigates both a linear and a non-monotonic relationship between top tax rates and GDP growth. Using a panel of 18 OECD countries over the period 1960-2009, this paper finds support in favor of a quadratic top tax-growth relationship. Results are robust to different model specifications and estimation techniques. The point estimates of the regressions suggest that the marginal effect of higher top tax rates becomes negative above a growth maximizing tax rate on the order of 60 percent. The quadratic relationship found for the whole sample period does not hold over the period 1975-2009. Instead, the link between top tax rates and GDP growth after 1975 is well summarized by a linear and positive top tax-growth relationship. Since top marginal tax rates after 1975 are well below the estimated growth maximizing level, such a result suggest that the top tax-growth relationship after 1975 might be placed on the upward-sloping side of the “growth-hill”. There is an even stronger positive top tax-growth relationship after 1985, when average top tax rates across OECD are lower than 50%.
update 2: new new link to a new pdf with less round off error in some calculations
Personally I think the null that there is any justification for the continued existence of the Republican party has now been rejected at standard confidence levels. Your milage may vary.
Wow, some grad student ran a bunch of numbers through his computer and came up with some really robust conclusions.
I guess that settles all debate for all time and we can shut down the GOP.
And there couldn’t possibly be other economic, political or business factors over this extended period of time.
I’m calling my Congressman right now. Wow.
I said you milage might vary. Santo did consider the standard other economic factors used in growth regressions. The results are similar with and without those variables. Also with and without country and period dummies. The basic results are really quite robust.
Robert
i am not sure I want to find myself on Rusty’s side in this, but I was about to write that “depends on whether “growth” is your reason to live.
Since I think the other parts of the Republican agenda are insane, I might not have too much trouble getting Rusty to disagree with me.
But I wonder if statuatory top marginal rate actually means anything… what are the actual as-experienced tax rates.? what actual cause-and-effect factors appear to be behind the correlation?
And if the people with the money and the power don’t really care any more than i do about “growth”… though for different reasons… why would you base a political campaign on raising their taxes?
I mean, don’t we have some real problems and potential solutions we could identify and let the taxes fall where they may.
for what it is worth, as far as i know i am the only person who has been calling for higher taxes during this recession… i think the causal factors suggest strongly that higher taxes at this time will not hurt the kind of growth that is needed to better even the short term financial welfare of the country and the people as a whole…. but all i hear, even from the Left, is “you can’t raise taxes in a recession.” Why not, we lowered taxes to get into the recession.
I’m pretty sure I shouldn’t have written the comment about rejecting the hypothesis that the Republican party serves any useful purpose. It’s a distraction.
I do think it is true. Yes I don’t think that GDP growth is the only good thing. But a key position of the Republican party is that it is very important. Their argument is that it is better to increase the size of the pie than argue over how to divide it. So if they have no clue as to how to increase the size, they lose even granting them what they consider to be their key claim (which I don’t except for the sake of argument). I think it is clear they have no clue as to how to achieve high GDP growth. Their two ideas are cut the top marginal tax rate and deregulate. We know how deregulation worked out. We now have strong evidence on top marginal tax rates.
Basically the claim that low top marginal tax rates are the key to growth is the main argument Republicans make. Without it what do they have ? Benghazi ? What other contribution do they make to the policy debate ? OK so they were more unanimously in favor of invading Iraq than Democrats. They are against gay marriage. They claim global warming is not happening or is not due to human activity or something.
Now as to the mechanism, well it is hard to explore given the limitations of available data. Santo discusses possibilities. To recap here
1) deficit spending is worse than taxes (except now that we are in a liquidity trap). This would be because public debt creates the illusion of wealth, higher consumption and lower capital formation, or, in other words, deficts crowd out investment.
2) Some tax revenue is spent on growth enhancing programs like education, building infrastructure, public R&D (from where did the internet we are playing with come ?) even health care. Some is wasted and more is spent on programs which are useful but not for economic growth. But it is still possible that the effect of higher taxes and growth promoting spending outweighs their incentive costs .
3) People decide between high income occupations and occupations which are rewarding in some other way. Those other rewards might be associated with growth. In particular people have shifted out of physics and into finance, because that’s where the high incomes are obtained. With high taxes on high incomes, working in finance is less attractive. If the financial sector has become larger than its growth maximizing scale (and really who doubts that ?) high taxes would tend to drive people to more productive fields.
But mostly the evidence for large growth reducing incentive effects of income taxes is very weak. Growth promoting effects of higher taxes don’t have to be very strong to outweigh the sort of effects one infers from micro data. I am thinking especially of after tax rates of capital income and consumption/savings choices (there is almost no evidence of any effect at all).
I have advocated balanced budget stimulus which implies higher taxes. In particular, I have advocated higher taxe on high incomes. Such taxes have a small effect on consumption. This is an advantage in a depressed economy in a liquidity trap. I think it is usually a disadvantage of taxing the rich which I nonetheless strongly support.
oh do statutory top rates mean anything ? Well they are statistically significantly correlated with Gp growth (and partially correlated with standard other explanatory variables). If they weren’t related to anything that actually happens, then why is the null that they have nothing to do with anything rejected by the data.
Not proof (note even my very strong comment for which Santo shares no responsibility included the qualifier “at standard confidence levels” which do not correspond to say proof beyond reasonable doubt).
Robert
basically, I agree with you. I would be tempted to suggest that when low top marginal rates are the law, it means the lawmakers favor other policies favored by ‘the rich’ which tend to be bad for the country, including “growth.” such as “deregulation.”
i note that rejecting the null hypothesis suggests that high top marginal rates is not meaningless… but again, is the meaning the tax rates themselves or the political regime that brought the rates.
and perhaps slightly lost in the argument is the “fact” that high top marginal rates is known not to be a factor, but calling for lower rates does win them elections.
less clear is that if you cut my taxes by, say, 200,000 a year then i don’t care so much about whether “growth” for the rest of you is 2% or 3%. i mean, i got mine. and with that i’ve got the leverage to keep doing better even if “growth” is less.
so, agreeing with you that the R “tax cuts for all seasons” is bad policy, it remains to be seen if we can turn it into bad politics.
only, what i see happening is that we all get into a “growth for all seasons” mindset, and even middle class liberals think their taxes ought to be cut. “class war” is not a good strategy. “class war” as a strategy while denying “any such thing” is self deception.
part of this you may not understand unless you have been in the pointless discussions i have had with my former friends on the left.
It’s noteworthy when a serious cross-national study produces results similar to Kimel’s conclusions regarding the history of US top tax rates and economic growth. Santo Milasi and Mike Kimel haven’t been wasting their time and talent on an unimportant question. If economic growth is maximized when top tax brackets are close to 70 percent, we ought to know this. Even if this isn’t the case, we need to know if the conservative/GOP claim–that lower tax rates on the highest incomes produce stronger economic growth–is just plain false.
Coberly is correct in that an explanation is needed if the conservative/GOP article of faith is to be decisively rejected and perhaps turned on its head. I’m not sure economists are up to the challenge because I suspect that they need some key clues about causal mechanisms from tax accountants and MBAs. And if they overcome this obstacle, then they’ll have to face-off against some very, very rich backers of opposition.
Progressive taxation can be an important tool in conserving natural resources, since it increases the relative present value of future returns, by reducing the returns to immediate exploitation of the resource. Consider an example: A capital good, a wood lot, say, provides an income stream of $100,000 in perpetuity. Now, if the tax is flat, and the resource can be cashed out, for $2,000,000, and invested at interest for 5%, then the owner would be indifferent to exploiting or conserving the resource. On the other hand suppose, with a progressive tax, the $100,000 was taxed at a miniscule rate, and the $2,000,000 at 50%. Then the owner would have to be able to invest the $1,000,000 that remained after taxes at a 10% rate in order to be indifferent to preserving or exploiting the resource. If this rate were unavailable, he would be more interested in conserving, rather than exploiting, this resource.
Indeed, progressive taxation increases the relative present value of any future income stream, and so encourages investment in the future.
Previouslyl posted at:http://anamecon.blogspot.com/2012/05/progressive-taxation-encourages.html#comment-form
“So if they have no clue as to how to increase the size, they lose even granting them what they consider to be their key claim (which I don’t except for the sake of argument). I think it is clear they have no clue as to how to achieve high GDP growth. Their two ideas are cut the top marginal tax rate and deregulate. We know how deregulation worked out. We now have strong evidence on top marginal tax rates.”
Exactly . . . and what a kool student you have.
Robert
I may not have been clear enough that your reply to me helped me to understand your point better, and agree with it.
I would suggest that ANY tax might help the economy if the money is better spent (or invested) by the government than it would be by the taxee.
It is not always the case that it would be, but that should be the criterion for making the decision, not some mindless magic formula like “tax cuts increase growth” or “you can’t raise taxes in a recession.”
Greg:
thank you. i can’t make my mind think that way, but as long as there are people who do, your observation should be kept in mind.
btw, i think your observation is very similar to the “mechanism” that Kimmel suggested to explain his result similar to Robert’s student’s.
For what it is worth, I agree with Greg and a variation on Santo’s third point (as recapped by Robert). Rightly or wrongly, most economic analysis starts from the premise that people act rationally–I know, I know, I have little empirical evidence for that proposition, but if we have to consider irrational behavior we never get anywhere. As Greg pointed out with higher tax rates the idea of preserving the woodlot in perpetuity increases. Similarly, I have made the point that when deciding how much to set aside for retirement, the amount the government subsidizes through deferral of tax should have an impact. I think in general, higher current tax rates will extend the future thinking of most everyone in various ways–making the next quarter’s numbers becomes less important when 70% of the gain goes to the government than when 20% does. Similarly, while Santo argues that as taxes increase income becomes less of a driver of career choice–which makes for better career choices–our best and brightest should be scientists not hedge fund managers–I would (and have) argued that even those hedge fund managers should be making more socially sound decisions if they are only going to keep 30% of that extra dollar of profit. In other words, while I may be willing to sell my mother to human traffickers if I get to keep 80% of the gain, I might have enough affection for dear old mom that I would not do it if I could only keep 30% of the gain. Unfortunately, I think it is a tough sell to argue that we should have high taxes so that rich a**holes act a little less like a**holes. Still hats off to Santo (and Mike) for doing the empirical work to demonstrate that GOP talking points since at least Reagan are nothing more than a cover for the unmitigated greed of the 1%
Terry
I think people are “rational” enough, by their own lights, that it is possible to predict their behavior. Indeed, politicians and marketers do it all the time.
The problem is “what they know,” which is usually shaped by… the politicians and marketers.
But as for short term vs long term, short term confers survival advantages… in the short term. Which, as even Keynes understood, is all we have. At least it’s all “the rich” need to obtain the high ground from which long term advantages… to them… tend to follow.
So, I think, the problem is not rational v irrational, or short term v long term, but “for whom.” The individual will almost always act in his short term self interest… acting “long term” only when he doesn’t see his interest adversely impacted in the short term.
The role of government is, or should be, to evaluate the long term interests of the country as a whole, and to “sell” the policy to the voters.
Of course we have a government that evaluates the short term interests of the people who already have the most, and sells the policy to the poor, ignorant voters…. or at least enough of them so the rest don’t feel there is anything they can do about it.
Self delusion, by the way, is not the sole property of the Right. I know of good Leftish people here, experts in their own way, who think that taxing the rich to pay for the “needs” of everyone else is “not welfare,” “because it is the right thing to do.” Even when the rest of us can very well afford to pay for our own needs, if only they’d let us.
Rusty, did it cross your mind to think of the famous 90% paper by R&R before you commented about stupid grad students grinding out numbers with a computer program. I bet they were not so stupid as to use an excel spreadsheet !!!!!
Dilbert
i thought about mentioning that to Rusty, but decided it wasn’t worth it.
What Rusty has offered is a classic “ad hominem”… what it used to mean before the internet got ahold of it. Rusty apparently cannot let the paper stand on its own merits, he has to know the “qualifications” of the author. In this way designated experts can fool the people who don’t know enough to think for themselves.
As you point out, sometimes it is only graduate students who have enough “academic freedom” to point out the Harvard professors have no clothes.
It was, by the way, not the fault of the excel spreadsheet that R and R got the wrong answer. Their paper was bogus on the face of it. But respectful academics can’t call respected academics frauds.
The effects of taxation is secondary to the purpose for taxation. The need for tax revenue is defined by the cost of government activities and those activities are defined by the needs of the governed. While those prioritized needs are an issue distinct from the relationship between tax rates and its economic effect it remains the basis for the need to raise government revenue. So long as there is a need for revenue that need is the primary purpose of taxing the economy as defined as the people and entities that derive their incomes from that economy. The potential effects on the economy are secondary to the needs of the governed. That’s why there is a government. The only real question is how big need be a government that governs 300 million people and the various associations between those who are governed.
Looking at the effect of tax rates on GDP has the cart before the horse.
Jack
more than that, the effect of taxes on “the economy” is speculative, to say the least. while if you concentrate on what the taxes are buying, and who is, perhaps, directly hurt by paying the tax, things are remarkably clear.
I would argue that no one is hurt by paying their taxes. True that some people are unfairly expected to pay less than their incomes would warrant that they pay and others are, therefore, over burdened by the unbalanced requirement. Those who gain the most from our government’s actions should be contributing the greater share of the tax required to support that government. Yes I’m saying that the very wealthy gain far more from the government’s actions than they want us to recognize. So they cry like children about government that is too big and too concerned about the less fortunate. They want the 99% to think that they are against big government, but that is a canard. The One Percent have their advantage because of their control of the big government.
Jack
you are right, of course, but maybe not right enough.
there are bad people, to be sure, who are rich, but maybe most of the people who are richer than me, anyway, are just people. they work and do well, and think of “their” money as theirs. and it is hard for them to let it be taken away even if they sort of think it may be necessary. they also think a lot of it is wasted or spent for evil purposes.
maybe it would help if we could think of them like that instead of always talking about them as though they were evil and greedy and
what is worse, that “we” deserved their money more than they do.
the poor need help. welfare until we can think of something better. but if we stop with welfare… especially with welfare from other people’s money… we are not being as kind as we like to think we are.
and by always talking as though we were going to take their money away from them (the rich) we make them our enemies instead of our partners.
the evil politicians depend on this.
The new government of France has been reading Angry Bear.
More than 8,000 French households’ tax bills topped 100 percent of their income last year, the business newspaper Les Echos reported on Saturday, citing Finance Ministry data.
http://www.reuters.com/article/2013/05/18/us-france-tax-idUSBRE94H0AX20130518
Let’s see how the French GDP skyrockets!
Sammy
you have discredited yourself so thoroughly saying nonsense about things i know something about that i cannot take seriously something improbable that you say about something i know nothing about.
I’ll take a stab at it: Sammy, the article above specifically states that there is an upper limit where the higher rates no longer seem to have a positive effect. But that, of course, would have required reading it before commenting.
Sammy
apparently, you don’t read French, or you would certainly have gone to the original before making your uninformed comment. The reason for total taxes exceeding income is the there is a wealth tax in France. (whether that is desirable policy is a topic for a whole different discussion.)
what the wealthy do in france as in USA is take advantage of stupid loopholes to reduce their incomes to nil, but continue to live very well off remaining income. At least the French system makes a slight reduction in inequality.
Not sensing a lot of confidence in the theory that higher marginal tax rates cause higher GDP growth. ( Actually, it’s not a “theory”; it’s a correlation in search of causation). You should be cheering that France will finally prove that higher taxes are great for growth.
Let’s skip the ad homs and see how France turns out, shall we?
Sammy, asking to “see how France turns out” would be quite reasonable IF the proposed 75 percent top income tax rate (for earnings about $1.3 million) is implemented, but the NYT reports that this hasn’t happened and the top rate this year is 45 percent (on earnings above about $200,000). So it’s gonna be a long wait.
Sammy
you don’t know what an ad hominem is, but i will forgive you because the internet is changing the meaning of the word.
if i had said your analysis of the French tax can’t be trusted because you are a Republican, that would have been an ad hom. But if I say you are an idiot, that is at worst an expression of exasperation.
The other folks here who have pointed out that you apparently can’t read are not indulging in either ad hom or (necessarily) exasperation. They are merely pointing out that you have got your facts wrong on the face of it.
No one here said that a tax rate of 100% was going to produce a higher GDP, they did say that up to about 70% there appears to be evidence that higher tax rates were correlated with higher GDP… and some of us offered reasons for why that might be so. Gosh, correlation in search of causation… pretty much what ALL “searches for truth” start out as.
The fact that your brain apparently can’t keep track of two variables, or one variable that rises to a maximum and then (perhaps) declines, is evidence that you have limited intellectual capacities. Not necessarily something to be ashamed of. But I wonder why you waste your time proving it to us.
What you are accomplishing is discrediting the entire “Right,” because like you, the rest of us tend to judge everyone of a certain color by the stupidities of their loudest voices.
There are arguments that could be made for the Right that deserve respect. You are not making them.
For Sammy and all the little Sammys,
Try to imagine a small country… call it Samstein…. ruled by Baron Samuel von Samstein.
The GDP of Samstein has been going up 10% per year, but all the extra money goes to the Baron who now makes one hundred million dollars a year, while each of the thousand peasants who work for the Baron have to get by on one thousand dollars a year.
One day a peasant named Samwise and his oldest son Samson make Baron Samuel an offer he can’t refuse. They tell him they can either cut off his head or just tax his income by 50%. But, the Baron protests, “if you raise my taxes you will destroy the great growth in GDP that we enjoy.”
Samwise and Samson are not impressed with this argument because they haven’t been enjoying any of the growth, so they insist.
And the Baron, considering the options, decides that an income 50 million a year after taxes isn’t so bad after all.
And sure enough, the first year of the new tax, growth in GDP is only 5%…about half what it was… because, after all, the Baron only has half as much to invest.
But the peasants don’t care, because they are sharing 50 million dollars between them… or about 50,000 dollars apiece. 50 times as much as they had before.
The first moral of this story is “growth in GDP isn’t everything.”
And the second moral is that with their new higher income, the peasants eat better and are stronger and produce more, and take more time off to think about better ways to do things, and pretty soon the growth in GDP increases, maybe not back up to 10%, but enough to keep everybody feeling that things are getting better and better, even the Baron.
You see, Sammy’s bullshit is the very reason why the need is to focus on the necessity to raise tax revenue in support of government activity while disregarding the arguments levied regarding the possible effects of taxation on over all economic performance. It is a straw man argument. Tax revenues are a necessity of governmental structure. While one can argue the merits of the activities that government performs there is no argument that can be made regarding the need to fund those activities. To say that collecting taxes has an effect on the economy is not part of the argument. It is a diversion which has served the wealthier sectors well. They pay a paltry percentage of their income in taxes. As a result all others have to pay more because the government activities that require the funds are going to continue. The result of reducing those activities in order to avoid raising taxes has had the effect of slowing our country’s economic rehabilitation.
And taxation is not a matter of transferring wealth. I don’t get a check when someone pays their taxes. The government engages in activities that benefit all of us in one way or another. That’s not a transfer of wealth, a propagandist term if ever there was one. All citizens benefit from their government’s activities. Some benefit more that do others, and those who do are not from the lower income levels. The wealthy benefit most because they control the government most directly.
So let’s cut the bullshit. Taxes are a necessary aspect of organized political life. That’s what states do. Our lives are made easier and safer when government is at its best. There are too many nay sayers who would like to obscure the realities of government and taxation, and they do so in order to gain their own financial advantage.
coberly’s last two posts are great examples of why people, and especially conservatives, do not often post comments on Angry Bear anymore.
Express an idea that coberly does not agree with and you are buried under misrepresentations, mischaracterization, non sequitors, insults, ad hominem (traditional definition) attacks, and no bon homme (there Raucher).
Never any citations, links, or learned knowledge or experience. Just coberly’s ill thought out ramblings. Since he doesn’t have a job, he just patrols AB all the time, ready to pounce with the full coberly treatment.
He doesn’t want to foster debate, he wants to squelch it. Because he knows he is too lazy to do the research necessary to compete.
Ah, young Sammy–projecting much?
Good one Joel!
Is this an example of “scientist snappy repartee”?
I only skimmed the paper so far but it looks fascinating. I have s theory that Robert Barro has done this work before but chose not to write it up. To me there seems to be a neat hole in his publication timeline shortly after he speculated that you could produce a quadratic relationship between growth and tax rates. If I were cynical I would speculate he didn’t like the results…
Sammy,
Dale and others are only pointing out the obvious. You’re a broken record in more than one way. You repeat, like the skipping record, the crap churned out by the corporatist sycophants and neglect the baseless character of those arguments. There are a few conservative commentators who put in their two cents. They are read and taken seriously when their commentary warrants same. You’re just a talking point spinner looking for any convenient spot to dish bullshit.
Jack
thanks. it’s probably my fault. i should remember that Sammy can’t be cured and either ignore him or just address the substance, if any.
I thought my little story about Samstein had some merit, just to try to direct people to the thought that GDP growth might not be the most important thing…. perhaps it is even a kind of useless distraction from the real issues.
but i’m not making any great strides there either.
Robert did help me out by explaining that his point was not the holy GDP but the fact that the Great Republican Talking Point is unsupported by the facts.
Sadly, I think, even this much insight will not be picked up by the Left and used against the R’s. We have seen how much they were damaged by the debunking of Reinhard and Rogoff.
It’s the nature of the Big Lie. Never admit, or even notice, facts to the contrary. And there are millions of little Sammys who believe every word. And can recite them with great conviction.
The mechanism is government spending. If you tax the rich and decrease spending you will have low growth. Remember government spending is a component of the GDP formula. Also there is a mechanism at play, just collecting an extra dollar in revenue does not in any way automatically redistribute that dollar.
Let’s look at history:
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001
2004-2007: U. S. Deficit Reduced 61% (from $413B to $160B) Great Recession began 2008
“If you tax the rich and decrease spending you will have low growth. Remember government spending is a component of the GDP formula”
Matt,
That is exactly my point. The purpose of taxation, whether of the rich or the poor, is to support government activities. What some people quaintly refer to as “government spending.” Yes, of course it is spending. how the devil can the government carry out its responsibilities to its citizens without spending in order to carry out those activities? The effect of the taxation on GDP is secondary to the effect of the spending. There is no reason to tax anyone if government spending, remember that’s what conservatives call government in action, is reduced. What is the revenue for if not to spend on actions.
What those government activities are is another matter for debate altogether. Tell the Governor of Oklahoma that the sequester leaves little room for the government to come to the aide of the tornado victims and you’ll soon see how much government spending is dearly loved and needed. There are no economic conservatives in the fox holes of disaster. Nor have I recently noticed that Boehner, or that fool Ryan, have cried over all the corporate welfare that their government is in the habit of distributing.
Matt
I cannot convince myself there is an automatic connection between “raising taxes and cutting spending” and “low growth.”
It might be very likely that is the effect it would have, but i think about 30 years of “cutting taxes” has shown us there is no automatic “increase in growth” that follows.
But neither is it obvious that “increasing spending” leads to higher growth. It seems to depend on what the money is spent on, whether by the government, by the “rich,” or by the “poor” (note.. i did not say it depends on WHO spends the money, but what they spend it on.)
There may be times when the government can spend the money “best.” And there may be times when “investors” can spend it best. And there may be times when “the poor” can spend it best… if for nothing else, for their survival, but also because their spending should draw out investments that won’t happen when no one is buying anything.
I can’t see any advantage to cutting spending while raising taxes… what would the government do with the “extra” money? Return it to the people they borrowed it from? And what would those people do with it?
I could go on with this and bore you to death… but i would like to just suggest that a more cause and effect line of thinking is apt to produce better choices than just relying on magic formulas.
The real correlation is between taxes and income inequality. High tax rates decrease inequality, low tax rates increase it.
When income inequality is too low, investment suffers – since the wealthy are the primary investors in the economy. When income inequality is too high, demand suffers – since middle class consumption drives demand.
By the late 70s, tax rates had been 70%+ for several decades, and the income share for the top 1% was at historic lows. This led to the supply-side economic problems and stagflation of that period.
Since 1986, the top rate has been below 40% and income inequality is now at historic highs. This has led to the demand problems we have today.
Michael
there may be some truth in what you say. but i prefer to believe that the stagflation was caused by the Fed fighting inflation without knowing what “money” was. among other things that led to the strong dollar that made american workers uncompetitive and drove companies overseas.
in either case we need to be careful of simple formulas.