Tax Rates v. Real GDP Growth Rates
by Mike Kimel (from 2012)
Tax Rates v. Real GDP Growth Rates, a Scatter Plot
This post was submitted by Kaleberg.
In this post, I will look at the relationship between top marginal income tax rates and real GDP growth using a scatter plot.
I am inordinately fond of scatter plots. The nice thing about a scatter plot is that you can present a lot of data in a fairly small space, so rather than just comparing tax rates at time period t against real GDP growth rates from period t to t+1, I can also show real GDP growth rates from period t to t+2, from t to t+3, and from t to t+4. (I.e., the scatter plot shows tax rates at any given time, and the growth rates over one year, two years, three years, and four years.)
The vertical axis is the GDP growth rate, the geometric average for multiple years. The horizontal average is the top marginal tax rate. The one year comparison is shown in dark blue, and each subsequent year is shown with a paler color and a smaller marker.
Data is for the period from 1929 to 2009 (i.e., all the years available from the BEA.)
Lower top marginal tax rates seem to limit economic growth with a rate of about 60% seeming to divide the restricted growth phase from the unrestricted growth phase. There might be a little falloff when the tax rate passes 90%, or there might not. There are lackluster growth rates associated with higher and lower top marginal tax rates. Mediocre growth is not all that hard to achieve. Finally, if high top marginal tax rates had a multi-year effect, we’d see a distinctive pattern in paler blue in this chart, but we don’t. The paler blue, longer term comparisons seem bounded by the single year effect.
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The data used in this scatterplot is the same data used to build the bar chart in this this post.
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Note from Mike Kimel – as always, if you want the spreadsheet (I have a copy of Kaleberg’s work), send me an e-mail. I’m at my first name dot my last name at gmail.com, and my first name is “mike.” My last name has only one “m.”
A word of warning. I’m not sure I can locate Kaleberg’s spreadsheet any more. Its been three computers ago for me.
But I note a few things… this post, along with several of mine going back as far as when I started posting (2006?) all make the point that historically, lower tax rates weren’t correlating with higher growth rates. In fact, the opposite seemed to be true. Of course, correlation isn’t causality, and its always possible there is some other variable out there not being captured. But one needs to be betting on such a variable exists to expect that at today’s tax rates, much less the ones we are about to get, we can expect growth rates to pick up back to where they were a few decades ago.
I’ve emailed you a few files that might be helpful. I may even have found the one that generated that chart.
Berkeley’s economist Emmanuel Saez
Chancellor’s Professorship of Tax Policy and Public Finance, Director, Center for Equitable Growth
has been publishing papers and spreadsheet data on the relation of economic growth to marginal tax rates for along time already.. His work has been the definitive economic source for this type of data as well as distribution of real pre- and post tax incoees by both indiiduals and households in 10 income brackets plus 0.1%, 0.01%, 0.001% etc.
You don’t need to grow your own.
One of Saez’s papers of a couple years ago showed that the economic break-even point to maximize national GDP in the US was a marginal tax rate of 70% at least, and possibly even higher depending on other tax policies. Sorry, but I don’t have the link available any longer.
Saez has access been provided IRS individual files and tax returns, sans actual names and individual SS numbers, but with unique indentifiers from year to year, so his data is the most comprehensive and detailed with factual data supporting it on the planet. The summary data by the IRS published reports is a gross summary… Saez’s has the details and breakdowns underlying the published IRS data.
Saez’s spreadsheets and data summaries, multiple easy to understand charts have been and remain widely available.
Anybody whose every been interested in income and tax effects in the U.S. layman and professionals know of this major source He’s published new spreadsheets with data summaries in many forms and charts with new data every couple or three years.
Itsy not like he’s a peripheral player in the field so I’m surprise to see somebody doing their own homegrown data from the sparse IRS summary data when the definitive unarguable data and analysis is so widely available.
About Emmanuel Saez
Emmanuel Saez is the Director of the Center for Equitable Growth at the University of California at Berkeley. He received his PhD in Economics from MIT in 1999. He was Assistant Professor of Economics at Harvard University from 1999 to 2002, before joining the faculty at UC Berkeley in 2002. He is currently editor of the Journal of Public Economics and co-director of the Public Policy Program at CEPR. He was awarded the John Bates Clark medal of the American Economic Association in 2009. His main areas of research are centered around taxation, redistribution, and inequality, both from a theoretical and empirical perspective.
https://www.econ.berkeley.edu/faculty/list
website at Cal:
https://eml.berkeley.edu//~saez/index.html
From Asimov’s The Foundation:
Please replace the data for GDP growth with population growth. I bet it proves that high tax rates CAUSE more robust population growth.
Mr. Kimel,
I agree, but that is only to satisfy personal “first hand” which neither you nor kaleberg have done, but instead used publically available gross summery IRS reports, so neither of you are neither using “observations of the data” but only that which is publically provided…. 2nd hand at best.
Maybe I should ask the obvious.. why have neither of you cited Saez’s comprehensive studies and analysis which use the original data sources. Or were you possible not aware of them?
Longtooth,
How very condescending. But OK, I will play.
If you do a simple google search, you will find several posts that I wrote citing Saez. In more than one of them, you will find an explanation about how my analysis is different from Saez’s. We reach similar conclusions (the optimal tax rate I computed is close to the optimal tax rate Saez calculated). However, a) my approach is far more parsimonious, requiring a lot less data, b) is easier to follow and more transparent, and c) (in my opinion) is more logical.
Additionally, this is a blog. You are arguing that every post on taxation at this blog should read, in its entirety: “Go check So and So. He covered this topic.” And the same would be true of other topics too. It would make for a really boring blog.
No,Mr.Kimel,
I am not arguing that posts on taxation should / must do anything.
I’m asking why kaleberg didn’t cite a well known and accepted authoritative source which for anybody looking into relation of taxes to economic growth is easily available on the web with far more insight and understanding available than kaleberg can possibly apply.
I’m asking because it would seem to me to be highly relevant to what kaleberg’s own home-grown correlation concludes, not to mention providing corroborative data and and authoritative source for AB’s readers to review if their interest is peaked.
I’m asking because I find it very strange that on this very difficult topic with many variables to control for kaleberg didn’t cite or mention the authoritative source…. suggesting perhaps he didn’t even know of it… though that also seems far – fetched for anybody researching the question.
Are you suggesting readers should question what any poster writes or states? Hmmmm.
Mr. Kimel
Correction and addition:
The following should read with the [] includsion:”
“Are you suggesting readers should [not] question what any poster writes or states? Hmmmm.
Additional:
I did not include your own posts on the topic because I’m not familiar with them, but kaleberg’s because his charted information is the one I was commenting on.
When I became aware of your having also done such home-grown analysis but in your own comments also did not cite or mention Saez’s authoritative information on the subject, I then also questioned why you didn’t mention it in your comments.
On such a far reaching issue with serious consequences I believe (just me perhaps?) trustworthy analysis is of the utmost importance and since neither you nor kaleberg have the credentials for such trustworthiness then I believe I’m entitled, indeed compelled to ask questions
That you don’t think I’m so entitled is even more interesting..
At some point I put up a post with guidelines for comments. I noted that one should always question what one reads, especially if one agrees with it. I also noted that I didn’t like arguing from authority. That’s my view of the world, anyway.
Mr Kimel,
Why don’t you like arguing from authority, which I will note can be and is viewed in multiple interpretations.
I view “authority” being acknowledged experts in their field, generally academics who have studied many aspects and have the advantage of much historical information from which to judge past and present knowledge on the subject. Though in many cases (most?) even the acknowledged experts come to different conclusions which then means arguing from authority requires using both of the conflicted authorities, rather than selecting just one, but in any event, both are using far more information and history than anybody else in arriving at their conclusions.
So the term “authority” can have many interpretations of what that constitutes, depending only on the reader’s or writer’s idea of what they deem to be an “authority”.
But, arguing without any authority is simply opinion expressed with no basis or foundation other than the writer’s own selective experiences at best, hearsay, perhaps, and made-up fictions at worst… the latter two dominating in my experience.
In arguing without any authority however, then argument is simply a way of passing time or entertainment with no redeeming value what-so-ever, so it may also be characterized as subjectivity at its extreme, which is to say fantasy… and it certainly isn’t to the benefit of advancing knowledge.
Having said that it is clear that we humans desire and like to relax and be entertained .. watching TV sit-coms are an example, enjoying music another, reading fictional novels, playing games or watching them, etc.
So in that regard arguing without authority is a pastime to relax or be entertained, which I conclude from your statement is your preference in argument..
If this post were Kaleberg’s opinion, your criticism would have a leg to stand on. But Kaleberg didn’t present his opinion. He presented some data in a clear, lucid, and easy to read fashion. Finding a way to present data so the data the data itself tells a story is an art, and Kaleberg performed that art very nicely in this instance.
He went on to add some verbage, but truth to tell, the verbage was un-necessary. The beauty, the art of what Kaleberg did with the data is that any reasonable and honest person could look at it and understand what the data showed. If the data speaks eloquently, and it does in this case, in what way is the art improved by adding the pronouncement of some eminence or other? Will someone who has an eureka moment looking at the graph understand the truth better because Saez, or Krugman, or an Angel of the Lord for that matter once said something that may or may not relate directly to the graph? If the answer is no, then spare me the authority. The truth is enough for me.
Mr. Kimel,
Your statement
” Will someone who has an eureka moment looking at the graph understand the truth better because Saez, or Krugman,… once said something that may or may not relate directly to the graph?”
Actually both and all economists on the subject of taxes v GDP growth use graphs as you well know. A graph is worthless as an educational aha moment of truth if the information source is a bullshit artist with intent to mislead as you also well know.
Therefore an authoritative source is the only way to make the distinctions.. or using authoritative sources to compare with.
Pretty pictures do not the truth make.
So you didn’t answer the question yet though: Why don’t you like arguing from authority?.
Mr. Kimel,
Actually don’t bother answering the question.. I already know why you don’t like arguing from authority..
Longtooth,
I have never claimed to be an authority. But if you insist on hearing an argument from authority, OK. Consider Richard Feynman and Carl Sagan. I am sure you would agree that they were authorities in their field. In fact, in the former’s case, it would be hard to find a greater authority in the second half of the last century. So I think we can establish these as fine authorities on what it means to be an authority. No disrespect to Saez, but he simply doesn’t qualify as that magnitude of an authority.
Now go to google, and see what these authorities had to say about the value of arguing from authority.
Why don’t you guys argue privately, and let’s get back to what the post is about, like if the goal is to increase GDP, why are we lowering the tax rate?
Jerry Critter:
“Why don’t you guys argue privately, and let’s get back to what the post is about, like if the goal is to increase GDP, why are we lowering the tax rate?”
What is omitted from the data in the post, if you want to increase GDP you want to increase population growth (more precisely labor force growth). And you could construct a similar chart that will show increasing the tax rate will increase population growth!
“population growth does not necessarily correlate to labor force growth;” however, putting more people back to work does many positive things.
“population growth does not necessarily correlate to labor force growth;”
No. For one, giving a huge subsidy to get people to have babies may boost population growth but it will take a 20 year lag or so before the large effects to GDP.
Second, Tom and Jane live next to Harry and Emma. For years the couples simply pleasured their spouse. All of a sudden the two couples start paying the neighbor to pleasure them (same amount). All of a sudden GDP increased even though the $100 bill keeps moving back and forth from one house to another.
Immigration
Run75441: I see I need to be more blunt with you. During “high” personal income tax years (pre 1980) there are two trends completely independent of tax policy that caused higher growth rates than years since the 1980s when we have had “low” personal income tax rates.
For one, birth rates declined over time – just like the highest federal personal income tax rate.
Second, prior to 1980 you had 3 decades where a YUGE number of women went from doing housework – which was not counted as GDP – to working outside the house where their work was counted as GDP. The housework still needed to get done so they either paid someone else (see child day care / maids) or purchased capital to improve efficiency (see wash machine / microwave). The newer methods for doing housework count in GDP as well.
In “wonkish” terms, the chart in the original post shows a spurious relationship.
Jay,
1. Your point about how women’s participation affects what gets counted as GDP has theoretical merit
2. Nevertheless, I am not sure it fits the data
Please look at the graph on page 2 of this document for a graph showing women’s labor participation in the economy to 1950.
Some commentary from eyeballing the chart:
a. Without having the time to pull the data and do this formally right now, it just doesn’t seem like the periods when that graph rose by the steepest were also the periods in the postwar era when the growth rate was the fastest. For example, simple eyeballing indicates that economic growth should have been much faster under Reagan than under Clinton, especially throwing in your birth rate analysis.
b. the peak seems to have occurred around 2000, not 1980
c. again, eyeballing the graph, the steepest incline seems to have occurred in the mid and late 1970s. And yet we look back at that period and say “stagflation.”
I recognize that bad policy may not correlate with good or bad demographic and workforce changes, but I’d want to see a bit of a correlation to be convinced. My lying eyes are claiming something different than you are claiming.
Jay,
Perhaps you need to keep in mind, if lower the top marginal tax rate does not correlate with an increase in GDP, it cannot cause an increase in GDP.