The top marginal income tax rate should be about 65%…
by Mike Kimel
Cross posted at the Presimetrics blog.
To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent. Preposterous, right? Well, it turns out that’s what the data tells us, or would, if we had the ears to listen.
This post will be a bit more complicated than my usual “let’s graph some data” approach, but not by much, and I think the added complexity will be worth it. So here’s what I’m going to do – I’m going to use a statistical tool called “regression analysis” to find the relationship between the growth in real GDP and the top marginal tax rate. If you’re familiar with regressions you can skip ahead a few paragraphs.
Regression analysis (or “running regressions”) is a fairly straightforward and simple technique that is used on a daily basis by economists who work with data, not to mention people in many other professions from financiers to biologists. Because it is so simple and straightforward, a popular form of regression analysis (“ordinary least squares” or “OLS”) regression is even built into popular spreadsheets like Excel.
I think the easiest way to explain OLS is with an example. Say that I have yearly data going back to 1952 for a very small town in Nebraska. That data includes number of votes received by each candidate in elections for the city council, number of people with jobs, and number of city employees convicted of graft. If I believed that the votes incumbents received rose with the number of people jobs and fell with political scandals, I could have OLS return an equation that looks like:
Number of incumbent votes = B0 + B1*employed people + B2*employees convicted of graft
B0, B1, and B2 are numbers, and OLS selects them in such a way as to minimize the sum of squared errors you get when you plug the data you have into the equation. Think of it this way – say the equation returned was this:
Number of incumbent votes in any given year
= 28 + 0.7*employed people – 20*employees convicted of graft
That equation tells us that the number of incumbent votes was equal to 28, regardless of how many people were employed or convicted of graft. (Bear in mind – that first term, the constant term as it is called, sometimes gives nonsensical results by itself and really is best thought of as “making the equation add up.”) The second term (0.7*employed people) tells us that every additional employed person generally adds 0.7 votes. The more people with jobs, the happier voters are, and thus the more likely to vote for the incumbent. Of course, not everyone with a job will be pleased enough to vote for the incumbent. Finally, the last term (- 20*employees convicted of graft) indicates that every time someone in the city government is convicted of graft, incumbents lose 20 votes in upcoming elections due to an increased perception that the city government is lawless.
Now, these numbers: 28, 0.7, and -20 are made up in this example, but they wouldn’t have been arrived at randomly. Instead, remember that together they form an equation. The equation has a very special characteristic, but before I describe that characteristic, remember – this is statistics, and statistics is an attempt to find relationships based on data available. The data available for number of people employed and number convicted of graft – say for the year 1974 – can be plugged into the equation to produce an estimate of the number of votes. That estimate can then be compared to the actual number of votes, and the difference between the two is the model’s error. In fact, there’s an error associated with every single observation (in our example, there’s one observation per year) used to estimate the model. Errors can be positive or negative (the estimate can be higher than the actual or lower), or even zero in some cases.
OLS regression picks values (the 28, 0.7, and -20 in our example) that minimize the sum of all the squared errors. That is, take the error produced each year, square it, and add it to the squared errors for all the other years. The errors are squared so that positive errors and negative errors don’t simply cancel each other out. (Remember, the LS in OLS are for “least squares” – the least squared errors.) You can think of OLS as adjusting each value up or down until it spots the combination that produces the lowest total sum of squared errors. That adjustment up and down is not what is happening, but it is a convenient intuition to have unless and until you are someone who works with statistical tools on a daily basis.
Note that there are forms of regression that are different from OLS, but for the most part, they tend to produce very similar results. Additionally, there are all sorts of other statistical tools, and for the most part, for the sort of problem I described above, they also tend to produce similar outcomes.
I gotta say, after I wrote the paragraphs above, I went looking for a nice, easy representation of the above. The best one I found is this this download of a power point presentation from a textbook by Studenmund. It’s a bit technical for someone whose only exposure to regressions is this post, but slides eight and thirteen might help clarify some of what I wrote above if it isn’t clear. (And having taught statistics for a few years, I can safely say if you’ve never seen this before, it isn’t clear.)
OK. That was a lot of introduction, and I hope some of you are still with me, because now it is going to get really, really cool, plus it is guaranteed to piss off a lot of people. I’m going to use a regression to explain the growth in real GDP from one year to the next using the top marginal tax rate and the top marginal squared. (In other words, explaining the growth in real GDP from 1994 to 1995 using the top marginal rate in 1994 and the top marginal rate in 1994 squared, explaining the growth in real GDP from 1995 to 1996 using the marginal rate in 1995 and the top marginal rate in 1995 squared, etc.) If you aren’t all that familiar with regressions, you might be asking yourself: what’s with the “top marginal rate squared” term? The squared term allows us to capture acceleration or deceleration in the effect that marginal rates have on growth as marginal rates change. Without it, we are implicitly forcing an assumption that the effect of marginal rates on growth are constant, whether marginal rates are five percent or ninety-five percent, and nobody believes that.
Using notation that is just a wee bit different than economists generally use but which guarantees no ambiguity and is easy to put up on a blog, we can write that as:
% change in real GDP, t to t+1 = B0 + B1*tax rate, t + B2*tax rate squared, t
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, we have enough data to start our analysis in 1929.
Plugging that into Excel and running a regression gives us the following output:
For the purposes of this post, I’m going to focus only on those pieces of output which I’ve color coded. The blue cells tell us that the equation returned by OLS is this:
% Change in Real GDP, t to t+1 = -0.15 + 0.63*tax rate, t – 0.48* tax rate squared, t
From an intuition point of view, the model tells us that at low tax rates, economic growth increases as tax rates increase. Presumably, in part because taxes allow the government to pay for services that enhance economic growth, and in part because raising tax rates, at least at some levels, actually generates more effort from the private sector. However, the benefits of increasing tax rates slow as tax rates rise, and eventually peak and decrease; tax rates that are too high might be accompanies by government waste and decreased private sector incentives.
The green highlights tell us that each of the pieces of the equation are significant. That is to say, the probability that any of these variables does not have the stated effect on the growth in real GDP is very (very, very) close to zero.
And to the inevitable comment that marginal tax rates aren’t the only thing affecting growth: that is correct. The adjusted R Square, highlighted in orange, provides us with an estimate of the amount of variation in the dependent variable (i.e., the growth rate in Real GDP) that can be explained by the model, here 17.6%. That is – the tax rate and tax rate squared, together (and leaving out everything else) explain about 17.6% of growth. Additional variables can explain a lot more, but we’ll discuss that later.
Meanwhile, if we graph the relationship OLS gives us, it looks like this:
So… what this, er, (if I may be so immodest) “Kimel curve” shows is a peak – a point an optimal tax rate at which economic growth is maximized. And that optimal tax rate is about 67%.
Does it pass the smell test? Well, clearly not if you watch Fox News, read the National Review, or otherwise stick to a story line come what may. But say you pay attention to data?
Well, let’s start with the peak of the Kimel curve, which (in this version of the model) occurs at a tax rate of 67% and a growth rate of 5.85%. Is that reasonable? After all, a 5.85% increase in real GDP is fast. The last time economic growth was at least 5.85% was in the eighties (it happened twice, when the top rate was at 50%). Before that, you have to go back to the late ‘60s, when growth rates were at 70%. It isn’t unreasonable, then, to suggest that growth rates can be substantially faster than they are now at tax rates somewhere between 50% and 70%. (That isn’t to say there weren’t periods – the mid-to-late 70s, for instance, when tax rates were about 70% and growth was mediocre. But statistics is the art of extracting information from many data points, not one-offs.)
What about low tax rates – the graph actually shows growth as being negative. Well… the lowest tax rates observed since growth data has been available have been 24% and 25% from 1929 to 1932… when growth rates were negative.
What about the here and now? The top marginal tax rate now, and for the foreseeable future will be 35%; the model indicates that on average, at a 35% marginal tax rate, real GDP growth will be a mediocre 1.1% a year. Is that at all reasonable? Well, it turns out so far that we’ve observed a top marginal rate of 35% in the real worlds six times, and the average growth rate of real GDP during those years was about 1.4%. Better than the 1.1% the model would have anticipated, but pretty crummy nonetheless.
So, the model tends to do OK on a ballpark basis, but its far from perfect – as noted earlier, it only explains about 17.6% of the change in the growth rate. But what if we improve the model to account for some factors other than tax rates. Does that change the results? Does it, dare I say it, Fox Newsify them? This post is starting to get very long, so I’m going to stick to improvements that lie easily at hand. Here’s a model that fits the data a bit better:
From this output, we can see that this version of the Kimel curve (I do like the sound of that!!) explains 36% of the variation in growth rate we observe, making it twice as explanatory as the previous one. The optimal top marginal tax rate, according to this version, is about 64%.
As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will grow more slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut. However, keep the tax rates at the new “lower, tax cut level” and if that level is too far from the optimum it will really cost the economy a lot. Consider an analogy – steroids apparently help a lot of athletes perform better in the short run, but the cost in terms of the athlete’s health is tremendous. Finally, this particular version of the model indicates that on average, growth rates have been faster under Democratic administrations than under Republican administrations. (To pre-empt the usual complaint that comes up every time I point that out, insisting that Nixon was just like Clinton in your mind is not the point here. The point is that in every presidential election at least since 1920, the candidate most in favor of lower taxes, less regulation and generally more pro-business and less pro-social policy has been the Republican candidate.)
Anyway, this post is starting to get way too lengthy, so I’ll write more on this topic in the next few posts. For instance, I’d like to focus on the post-WW2 period, and I’m going to see if I can search out some international data as well. But to recap – based on the simple models provided above, it seems that the optimal top marginal tax rate is somewhere around 30 percentage points greater than the current top marginal rate. The recent agreement to keep the top marginal rate where it is will cost us all through slower economic growth.
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As always, if you want my spreadsheet, drop me a line. I’m at my name, with a period between the mike and my last name, all at gmail.com.
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It occurs to me that I should probably explain why I used taxes at time t to explain growth from t to t+1, rather than using taxes at time t+1. (E.g., taxes in 1974 are used to explain growth from 1974 to 1975, and not to explain growth from 1973 to 1974.) Some might argue, after all, that that taxes affect growth that year, and not in the following year. There are several reasons I made the choice I did:
1. When changes to the tax code affecting a given year are made, they are typically made well after the start of the year they affect.
2. Most people don’t settle up on taxes owed in one year until the next year. (Taxes are due in April.)
3. Causation – I wanted to make sure I did not set up a model explaining tax rates using growth rather than the other way around.
4. It works better. For giggles, before I wrote this line, I checked. The fit is actually better, and the significance of the explanatory variables is a bit higher the way I did it.
67% hey? Garbage. Get a new computer, yours is not working.
Mike, so you are proposing that a total tax rate of ~78-80% is the optimum for growth. Oh, wait. 47% of the tax payers do not pay federal income taxes, so that rate only applies to the upper 53%. Moreover, to believe Mike’s analysis, he asks us to blindly believe that marginal (federal) tax rates drive the economy.
I won’t re-cite the BEA reports i last referenced, but I will relate Mike’s belief to what I study every day, Anthropogenic Global Warming and the CO2 causation. Even though history shows us there have been ups and downs in temps/economies (yes, that’s plural) any correlations between CO2/marginal tax rates to temperatures/economic changes break down as we extend the time frame.
You see, if we are to believe Kimel’s curve as an economic causative/measure, it would have to hold up over time and environments. If we can find that/those correlation(s) then we could explain how and why Kimel’s curve is true and not just coincidental to his pet theory.
Nope! Still totally unconvinced. Even Ms CoRev wonders where such ideas come from. Her response: “Why would anyone work if the Govt is going to give them what is needed?”
CoRev–An Aside/OT remark here. Why are you interested in AGW/CO2 causation? NancyO
Rev–Why wouldn’t you work anyhow? You may like to work–grow your own food that you could sell as well as eat. Or raise chickens for eggs. Or do carpentry…All sorts of stuff you could do at least for barter or sale. Why would you just sit there if you could occupy yourself otherwise?
So, I answer a question with a question. What’s the proof that high/low taxes in this country have any relationship to the economy at all? Very few people at the high end pay a larger percentage of their income to taxes than people in the middle. So, right off the bat, seems to me that higher income people haven’t got a lot to complain about. Taxes aren’t the deal. What people do with money besides spend/invest it in this country is the big deal. They have all they need from rents, they won’t really work will they? Hmmmm? NancyO
I’ll propose a reason why high marginal tax rates have cooincided with high growth periods: when there are high margnal rates the best use of surplus cash is to invest in the company itself, research, product and process improvements, et cetera. When marginal rates are low it makes more sense to simply take the money out of the company for use by the management and shreholders (in that order).
What we have seen in the past decades is exactly what I posit: more-and-more cash is going to executive compensation and little to actual corporate development. Outsourcing is the quick-and-dirty method towards assuring that profits remain high so that executive compensation is to be continued.
Where does the excess money go? Speculative investments — anybody interested in some Tulip Bulbs?
“…Oh, wait. 47% of the tax payers do not pay federal income taxes…”
Sheesh. First, you must consider that people support the economy not only by paying taxes but by being people – working, raising kids, buying stuff. Without human effort, the taxes are meaningless.
Just being alive requires a minimum level of income or other resources, and pushing people below that level via taxation is not only cruel, but contra-indicated if you want a stable, prosperous country. The Line 2 personal federal deduction ranges from $5,700 to $11,400 depending on the sort of household — hardly enough to live on.
A useful overfiew is here. Leonhardt says, in part: “There is no question that the wealthy pay a higher overall tax rate than any other group. … But there is also no question that their tax rates have fallen more than any other group’s over the last three decades. The only reason they are paying more taxes than in the past is that their pretax incomes have risen so rapidly — which hardly seems a great rationale for a further tax cut. “
Noni
I guess I’m being panglossian here, but, what if there were no “Empire” to contend with on the U.S.A. side, the perks & loopholes that business enjoy, especially the what ever 500, no living off the credit card, none of those no bid cost + contracts, prohibiting of both government (comgress, staffers, etc.), Military officers, moving into private industry that supply the Government, strict adherance to laws & the regulation of same, royalties paid for minerals from public ownership, and I’m sure this is only scratching the surface, would that then justify the present tax rate?
As I read the comments here & other sources, when ever anyone speaks of a higher tax rate for what ever reason, the howls of anguish reach highs that excede a “Tenor” in good voice. I also note that these same howls appear to come from the “Boomer” generation. But. are they not the ones who have gotten us in the mess were in today?
Two things.
1) There’s an easier way of explaining this Kimmel Curve. The period of high marginal tax rates is essentially 1940 is through to 1980 ish.
That was also a period of high growth, absolutely correct. But there’s a very good argument that that period of high growth came about precisely because, whil;e technology and productivity were roaring along in hte previous 20 years, there wasn’t all that much economic growth about. So, we might ascribe the high growth to the previous high productivity growth without economic growth.
In other words, while your regressions shows a correlation, the causation simply isn’t there.
2) In the economics of taxation it’s always made very clear that long term effects are different from short term. So try lagging your growth by a decade or two against your tax rates, see what happens then.
(Actually, that last is a little unfair, as I know exactly what will happen. The high tax rates of the 50s will explain the low growth rates of the 70s, the lower but still high rates of the 60s the pick up in growth in hte 80s….)
I appoligize for an error, not all “Boomers” are what I consider responsible for the mess were in, as there are plenty of good honest hard working people who really do care, but are usually drowned out by that other majority because they screem louder.
Mike
i came to scoff. And stayed to pray.
I think there is considerable danger that you… or some mythical future congress… would take your results too seriously and we would have some grim mirror image of trickle down, but for now i think it can only be healthy to present evidence that raising taxes is not going to put us back in the stone age. CoRev, of course, will refuse to work, but the rest of us know that even if the government provides everything we need, we will still manage to think of something else we want.
i think George N Wells is agreeing with another Kimel theory. I don’t know about Jed’s correlation, but i suspect detailed analysis will show that he’s not talking about the same thing Kimel is.
Meanwhile top MARGINAL rates probably don’t have to mean the same thing from one time to another. I could have a 90% top marginal rates on incomes over a hundred million, and that would not the same as a 90% top marginal rate on incomes over a hundred thousand.
so let me fall back on the Coberly curve: pay the goddam bills. then pay for what you need or want. pretty much the economy will take care of itself. a tax is about the same a gravity or friction. a cost of doing business, not a reason to down tools and go on strike because it’s “too much” in an economy where most people have more than they know what to do with.
but the social infrastructure that made us rich is crumbling because we are too damn greedy to change the oil.
norman
but in any case if you are going to have an Empire you are going to have to pay for it. and if the tax rates to pay for empire cause slower growth, well, that’s the cost. what we have today is a congress that wants empire, but doesn’t want to pay for it… except by forcing old people to work until they drop.
worstall
can’t you tell when you are trying too hard. there are undoubtedly dangers associated with excessive taxation, but when you have to propose ten year lags you, and CoRev, are simply announcing that you can come up with any rationalization to deny any facts you don’t like.
as long as you can fool yourself and fool the people… who after all like lower taxes too… you will win the political argument. but watch as your own living conditions get worse, and your own “deficit spending” creates a debt you can’t solve.
Dear tax the other people crowd:
Will you donate to a charity that have an operating expense greater than 50 percent? Or simply pay someone over 50 percent salary and less than 50 percent real work?
This game is played by the congress, state, county, municiple level. When is it acceptable when over 50 percent of the tax dollars goes to pay retiring baby boomers? Why do you think almost every state is near bankruptcy? Isn’t that majority of taxes should be used to provide services.
This is the same thing from wall street, let’s pay ourself with other peoples money! Let pay AIG, bankrupt with other peoples money and let’s get congress involved, let’s pay with tax payees money.
I think it’s simply wrong and oppressive to ask people whom honestly work, contribute to have the majority of their working life paying government, taxes. Is it fair to ask someone to do it? Is this why we founded America? To pay higher taxes? The baby boomers have used up the savings from the generation that sacrifices themselves, now they want all the bells and whistles and screw their children.
How about just tax at 100 percent? Problem solved?
CoRev
it’s hard to believe 47% of working age people have less money than I have… and I pay Federal Income Taxes. So I think your 47% must include retired people and babes in arms, school children and people sleeping under bridges. Or were you thinking of General Electric?
NanO said: “ What’s the proof that high/low taxes in this country have any relationship to the economy at all?” If you remember the BEA references of last week, that is precisely what they said.
Dunno, that may be why I object to Mike’s single variable analysis.
m. jed,
I had forgotten about your post. I also don’t have the pop data handy right now. But I think I know how we’re getting different results, and I will be covering what I think causes the difference in our results.
Something that didn’t go into the post because it was getting too long – and which I plan to discuss in coming posts – is that the optimal tax rate with the naive model is a bit lower (I’m getting in the fifties for the naive model – just tax rates and tax rates squared) in the post WW2 era. The fit drops too.
Now, your demographics seem like a good explanation, but they have two problems. I wasn’t thinking demographics this weekend when I checked for structural breaks, and there is one that explains a lot… and which in turn cannot be explained by demographics. (Like I said, this is a topic for a later post.) But I want to focus on something that can be covered intuitively in a short comment: the difference between our respective data sets. The demographic variable might explain away why growth in the 1960s was so fast, if you’re starting with the 1950s. It will not explain why growth was so fast from 1932 to 1940 and it would be one heck of a coincidence that both periods enjoyed that one big demographic bulge.
Anyway, like I said, I will be spending a lot of time on this concept going forward.
Bruce,
Sadly, the other computer I pulled up the file in this morning is also damaged the same way.
NanO, aren’t you arguing against Mike’s findings?
CoRev,
BEA statistics begin in 1929.
In that time, there have been three years in which real growth exceeded 15%. Minimum tax rate for those three years: 81%.
There have been 5 years in which the real growth rate exceeded 10%. Minimum tax rate during those five years: 63%.
There have been 11 years in which the real growth rate exceeded 8%. Minimum tax rate during those 11 years: 63%.
There have been 17 years in which growth rates exceeded 6% a year. Minimum tax rate during those 17 years: 50%.
There have been 36 years in which real growth exceeded 4% a year. Minimum tax rate during those 36 years: 38.5%.
Perhaps you’re starting to spot a pattern here?
George Well,
I’ve stated that before, but never as elegantly.
Having been a CPA during the high marginal rate era, there is one problem that likely does not work its way into the model.
During the high tax rate era large corporations (ATT, ITT, IBM, GM) dominated the economy and innovations, and entrepreneurs were suppressed.
Why?
Entrepreneurs are always short of cash, and when the business got momentum it ran into the high marginal tax rates. This tended to protect the big corporations from smaller innovative companies.
The law of unintended consequences…………..
NanO, I dunno for sure, but think because it predicts so many catastrophic events that we have little to NO HISTORY of ever happening. I have been skeptical of anthro-centric explanations of nature for many decades. For me it rings so untrue and egocentric, when we are little more than a pimple on nature’s back side.
I guess I just don’t believe mankind is unnatural to this planet’s “nature.” Now, when we move to a totally different planet and we are unnatural. Finally, there are so many statistical exagerations being perpetrated in the name of AGW, that it is hard for any but a true believer (religious fervor level here) to actually believe in those exaggerations.
AGW and Mike’s single variable economics are similar in that they are simple solutions for a complex (economics) or chaotic (climate) problem.
You even seem to dispute Mike’s single variable explanation for economic growth, if you believe in AGW, then you are also in belief in a single variable driving an even more complex climate.
str,
That’s a pretty general statement that would be tough to support with any form of objective data. What innovations are you referring to that did not get developed in the past fifty years? Are you suggesting that all the modern communications technology, medical advances, transportation improvements, electronics, etc, etc, have all occured in the past ten years? That seems tough to believe. Progress has been steady, I would guess, inspite of the tax rates. It’s spending and jobs that may change, but not innovation.
“When is it acceptable when over 50 percent of the tax dollars goes to pay retiring baby boomers?” Pax Romana
Given all the discussion on this site over the past several years that statement stands out as representative of near total ignorance. Pax, give us all a break and do some homework before mouthing off with such bullshit.
tim worstall,
Response to 2 first… I’ll have to play with longer lags.
Response to 1. Actually, the periods of high tax rates began in 1932 – tax rates were raised from 25% to 63%. Leaving out WW2, ’32 to ’40 also produced the fastest economic growth for the time period for which we have actual data.
A simpler hypothesis… The fastest economic growth for the time period for which we had data occurred in WW2. That was the period of biggest increase in what one might call government interference in the economy. The second fastest was 1933 – 1940. That would be the the launch of the New Deal, the second biggest period of government interference in the economy. The third fastest was 1964 to 1968; that would be the launch of the Great Society, and by now I suspect you see where I’m going.
CoRev
i’m with that. if the tax rate has no relationship to the economy, lets raise taxes to pay our bills, and the economy will do just fine, or not, for other reasons.
co rev
if you believe man is not affecting this planet, you don’t get out enough.
i am not much of a true believer type, except i did take high school chemistry seriously enough to remember a few facts routinely wished away by the climate deniers.
pax
you are living in a fantasy world.
public employees work. ss retirees paid for their benefits.
there are aspects of public spending i don’t like myself. that’s what elections are for. the problem is when the Big LIars have convinced the Big Fools that they can eliminate government entirely… or just the parts they don’t understand… and that all that money will just come home to feather their particular nest.
Let me propose a new thing for you to look at (since I don’t want to do the work myself 🙂
A combination of higher tax rates with higher poverty rates will increase growth. Growth comes when businesses invest, which comes when they perceive a need. If the government gives money to people who will spend it, demand rises and businesses invest.
Over the past 75 years, the number of people in poverty has reduced. The multiplier for additional government spending has decreased. Periods of high growth have been less pronounced.
Businesses are pretty bad at figuring out when to stop increasing investment. The real estate boom ended in a crash. The dot-com boom ended in a crash. But the Baby Boom kept getting extended, so dragging people out of poverty kept working for a long time. There are less people in poverty, less people with high multipliers, so optimal tax levels (with respect to increasing growth) are lower than they were 50 years ago.
Thank you.
JaB (a retired boomer)
“anybody interested in some Tulip Bulbs?”
Quoting a movie, and your expecting to be taken seriously? WOW!
It’s the unfunded liabilities that are going to kill us….not infrastructure spending for example.
Look at the states seperatley……they are sinking because of pensions.
If your including the years 1929 thru 1945, there is no way an honest analysis can reach an honest conclusion. Leave those years out! The economy was driven by different variables that today. We are a financial sector based economy right now….we have given away our power….apples and oranges!
Don’t have enought time to work on this right now, but I will say in 1931, % of population aged 45-54 was 10.7%. In 1940 it was 11.8%. In 1992 it was 10.7%, in 2000 it was 13.5%. To be fair, in 2008 (the most recent in my file) it was 14.6%.
The other interesting component is the change in “non-working” demographic of under 15 and 65+, which went from 34.5% in the 1931 to 31.8% in 1940; and from 34.6% to 33.8% 1992-2000 and to 32.9% in 2008
Other demographic groups may have greater explanatory power, I chose this one, IIRC, because it’s traditionally the highest earning cohort.
Mike your respnse is nonsensical. You just said of the 81 years since 1929, 72 of them had growth and tax rates exceeding 38.5%. But your argument is: “To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent.” So, to interpret the marginal income tax rate should be ~ 58.5 to 71.5%. In the BEA numbers you cite, that occurred in less than 24% of the time. While the good growth, 4% or better, occurred in more than 88% of the time with a 100% correlation that there were marginal income taxes collected.
So, you have taken one piece of data where taxes and economic growth were maximized, and shown a correlation of a totally different theory regarding their optimums. The data clearly show that maximum growth occurs/ed at 81%.
So the pattern I am seeing is one of an economist locked into a simple theory to completely explain a complex system without the barest of understanding of causation.
In the real world you are suggesting the solution to ressions is raising taxes, and to eleiminate recessions raise taxes to astronomically high rates. Isn’t that the real world implementation of your findings?????
If @Pax is referring to SocSec. let me remind everyone that the highest SS payment is still at or just below the poverty line. Oh, and when the “hard working taxpayers” morphed into lazy entitled boomers, they had paid into SS for their whole working lives. SS, which they paid for up front, is now all that is keeping many from kicking their jobless kids out of the basement so they can live there themselves.
Oh, and in looking at the comments, one factor seems to have dropped out of the discussion — Mike is discussing the Top Marginal Rate, the rate people pay on all earnings after the first quarter million or so a year. They still have a good chunk of the quarter million to play with.
m.jed
no doubt, but you are taking some unnecessary restrictions on the data which i suspect completely invalidates any general conclusion.
disclaimer: i know nothing about econmics, and only a little bit about thinking straight. but i like Mike’s conclusions because they at least show why we need to take the conventional wisdom a little less seriously. the conventional wisdom always turns out to be a rationalization for doing what people with money want to do. and that always turns out to be “less than optimal.”
but in fact, worrying about what is optimal is what i am arguing against here. we don’t know what is optimal. never will. but we should be able to tell when what we are doing is hurting real people right now. and i don’t mean by not giving them more money to spend at walmart.
Sticking with Oil has nothing to do with greed…It’s common sense. Show me what to switch to without destroying the economy, and I’ll bite!
“i did take high school chemistry seriously enough to remember a few facts routinely wished away by the climate deniers.”
Yeah…Like What?
sharkey
we are ALWAYS in a different economy. Mike is just looking at some variables to see what explanatory power they may have… if only to dispel the “explantory” power claimed by those who want to reach the opposite conclusion.
for myself, i don’t think that maximizing growth is even sane, let alone the criterion upon which policy should be based.
Dale, when hgave I ever said tha man is NOT affecting the planet? What I said above is that man’s effect is natural. Just as natural as a volcano, hurricane, increase/decrease in solar radiation, etc. BTW, which of that list is most influential on climate? Hint: where does that ole heat come from?
pax
the model you are working with is the model of a dysfunctional family in which if sister sue gets the bigger piece of burfday cake, brother bob has to get the smaller.
actually a country is more like an organism… if your left arm gets more food so does your right arm.
the stronger each of us is, the stronger we will all be.
the problem is that there are people smarter than you who go around telling you that the smartest thing for you to do is hulk in your cave and guard your bones from the other cave dwellers. and because those people are so sleek and fat you figure they must know something. then they go back to the valley where they live on milk and honey, and send you messages every year reminding you how important it is to stay in your own cave guarding your own bones and don’t pay any attention to those communists who want you to learn to work together.
“The fastest economic growth for the time period for which we had data occurred in WW2.”
Making things then blowing them up doesn’tr meet my definition of either adding value or of economic growth. Sorry, but I simply don’t trust wartime statistics on growth (any war, any country).
“The second fastest was 1933 – 1940.”
That’s rather my point actually. The immediately preceeeding four years were the largest contraction in a peacetime economy anywhere by anyone. Of Course there was going to be strong economic growth after that. Even dead cats bounce you know.
64-68, sorry, don’t know enough about the US economy to be able to comment.
My argument is encapsulated here:
http://www.marginalrevolution.com/marginalrevolution/2010/12/books-to-crave-a-great-leap-forward-1930s-depression-and-us-economic-growth.html
“This thoughtful re-examination of the history of U.S. economic growth is built around a novel claim, that potential output grew dramatically across the Depression years (1929-1941) and that this advance provided the foundation for the economic and military success of the United States during the Second World War as well as for the golden age (1948-1973) that followed. Alexander J. Field takes a fresh look at growth data and concludes that, behind a backdrop of double-digit unemployment, the 1930s actually experienced very high rates of technological and organizational innovation, fueled by the maturing of a privately funded research and development system and the government-funded build-out of the country’s surface road infrastructure. This substantive new volume in the Yale Series in Economic and Financial History invites renewed discussions on productivity growth over the last century and a half and on our current prospects.”
The simplest way of putting this is that the normal technological and productivity trends weer humming alonog from 1929 to 1941. But there was very little overall economic growth. Thus the post war long boom was really being driven by catch up .
sharkey,
they are sinking because the people who got all the money won’t pay taxes. those damn pensions were earned. that was part of the money they were paid for working… real work that benefitted you… they took that part in deferred compensation because they figured that was safer than taking it up front and playing games on the stock market.
they figured the state would be good for it. little did they realize the state was made up of people who would turn out to be just like stupid and greedy bosses always turn out.
arne
i tend not to agree. being soft here because i don’t know. but if there is poverty at all, there is room for some kind of growth. we may not need the RATE of growth that we had in the past, but we need better directed growth.
in any case the last “stimulus” was spent on rescuing rich people from their own folly, so it’s hard to claim any reduction in the multiplier.
“Why would anyone work if the Govt is going to give them what is needed?”
Ms. CoRev has uttered a non-sequitor. This post has to do with the impact of government taxation on growth rates, not on the nature or level of spending funded by those taxes.
Coberly,
The pensions were typically negotiated by a union, they negiotiated more than what should have been negiotated for. Now the states are going to sink! Doesn’t mean they don’t deserve a pension, but look at California’s situation, most of the pensions state workers and teachers are going to get are clearly undeserved. I happend to believe this was by design…Cloward and Piven Baby!
No, Rev. I don’t think he is arguing for a causative relationship. People who advocate low tax rates or a flat tax say that their ideas would cause economic growth better than higher taxes. I think that what Mike is saying is that look at these years–no support for the high rate produces low growth theory. NancyO
Coberly
Noticed that I actually support taxes and government, but what I trying to point out is accountability. Whenever I donate to charity, I always check their expenses and make sure more than half goes towards helping people. I once noticed a very famous national charity have over 70 percent administrative expense… That’s called fraud.
A progressive tax system have to make sure everyone contributes, even for the poor and rich. This is missing in our society. The honest working people is paying for people that can be productive and don’t work, and people in government/wall street that is screwing the tax payers.
I just don’t agree at all with the ultra left idea of screwing the productive rich because they seemed like a easy target. Is it really fair to ask someone to work more than their adult life in taxes? Should rest of us follow this example and bear the same responsibility? Don’t ask someone else to do it unless you are prepared to share the same accountability. This is missing in our current society… The greatest generation all scarified yet the later generation gets progressive less so…
Pax –
Coberly is too polite.
Your post is not only mean spirited, it is butt ignorant, bordering on deep stupid.
Like all my boomer brethren, I paid into SS for over 40 years. What I collect now is deferred pay. Same with pensions, which employers owe to their retirees as part of their contractual obligations. It makes no difference if that employer is General Electric, or the great state of New Jersey. This bears repeating, since you think State taxes should pay for services – State pensions are deferred pay for services rendered. The inability to pay comes from an unwillingness to tax.
Your Federal tax dollars don’t pay my SS. They pay for wars. How do you feel about that?
I think it’s simply wrong and oppressive to ask people whom honestly work, contribute to have the majority of their working life paying government, taxes.
Which is exactly why we have progressive taxation, and tax credits for the working poor.
I hope you usually think things through better than this.
BTW, in case you’re interested, In U.S. history there has been one major cause of deficits, and that is spending on the military. Since Reagan, there has been a secondary contributor, and that is not collecting enough taxes.
The Viet Nam war (pre-Reagan, remember) did NOT lead to big deficits, because tax rates back then were high enough to cover the cost.
http://jazzbumpa.blogspot.com/2010/12/history-of-federal-deficits.html
So, what did W do? Go to war and cut taxes! This is the most grotesque example of fiscal irresponsibility in all of human history.
California’s fiscal woes are the legacy of Prop 13. Texas is just as bad off, but somehow that never gets mentioned.
Now, I must go hug a squid.
JzB
It’s not about pensions and social security per se. But accountilibilty. At all levels we as an society have chosen to be blind to the problem. I.E. Whose going to pay for it!
It is rather naive… Oh! Look at the past, just raise the top marginal tax rate.. Problem solved!
But with the firm guidance of congress, who have exception(s)…. Your not really taxing anyone who games the system.. The unions, wall street, politicians…
Only the honest, “stupid” people pays taxes… Oneday we will run out of those accountable people too…
NanO, he defintely is proposing a causative realtionship. Otherwise why do the analysis at all? The only thing I could decipher from Mike’s BEA numbers in his comment is that we are actually a very successful economy.
They are sinking because they have been underfunding those pensions for a couple of decades. This is stupid short term thinking that has only reached crisis proprtions becaue of the current downturn.
Forgive me if I’m misreading you, but –
Pleae stop blaming retirees for peoples’ stubborn and shortsighted unwillingness to pay for essential services.
JzB
Pax,
I agree that there is definitely a lack of accountability in society. Its a real pity that we have a Bill of Rights and no Bill of Responsibilities, and I’m not being facetious. Everyone knows their rights, and nobody feels any responsibility.
Anre –
Your broad brush is painting an inaccurate picture.
Poverty wasn’t measured 75 years ago, but from what we do nkow, it’s a safe bet it was higher then. There have been exactly two known periods when the poverty rate has gone down: 1) Kennedy-johnson and the Great Society, and 2) the Clinton adminaistration.
This takes no work, since the Census Bureau has done it for you.
http://jazzbumpa.blogspot.com/2009/09/republicans-all-wrong-all-time-pt-4.html
Here is some work I have done. The last decade has undone most of the Clinton’s poverty reductions. The number of poorest of the poor has grown the most during W’s “ownership society.”
Net result is there was virtually no improvement in 2008, compared to 1980. The last two years have only gotten much, much worse.
Your theory is blown, and your conclusion re: tax rats makes absolutely no sense.
JzB
I would happily believe that the marginal tax rate does not drive economic performance. If we accept that view, then we are free to use the marginal tax rate to pursue other goals, such as reducing the deficit and redressing income differentials.
If, on the other hand, we believe that marginal tax rates do play a role in determining outcomes, then we need to understand what that role may be, and that requires looking into the data. What we can’t honestly do is claim that marginal tax rates are important when selling tax cuts, and then claim they aren’t important when data show that tax hikes might produce better results.
Forgot to include my 2nd link.
http://jazzbumpa.blogspot.com/2010/09/poverty.html
JzB
tim worstall,
I saw that post at MR, and while I haven’t read the book, my first thought was:
a) this guy Field seems to actually have some familiarity with 1930s which is very unusual for an American writing about the 1930s
b) he’s missing one key detail about unemployment figures for the 1930s – they seem to all trace back to one clown who created a series long after the fact who decided that it would be clever to classify people employed by the WPA and the CCC and similar agencies as being unemployed. Its one thing to treat WPA workers as not part of the labor force (like folks in the military), but calling a few million people who are getting paid to build roads and the like unemployed is the kind of thing you’re only going to do if you’re trying to bias the numbers.
c) that is to say, we overstate how bad the Depression was, post 1933, for folks who were not affected by the Dust Bowl. (For folks affected by the Dust Bowl, no overstating is possible.) Not that times were good, mind you. However, people in my family tend to live forever, and from conversations I’ve had with them, working and lower-middle class families survived, often on a single paycheck, throughout the mid to late 30s. These days such families don’t keep the house.
CoRev wrote:
“In the real world you are suggesting the solution to ressions is raising taxes, and to eleiminate recessions raise taxes to astronomically high rates. Isn’t that the real world implementation of your findings?????”
However, Mike had already covered CoRev’s question:
“As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will grow more slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut. However, keep the tax rates at the new “lower, tax cut level” and if that level is too far from the optimum it will really cost the economy a lot.”
A policy of cutting taxes during recession – which Obama recommended and Congress did – does provide a short-term lift to growth. Leaving the tax cut in place causes a long-term deterioration in growth. That, in short, is what Mike had already said.
kharris
excellently said. (btw i am glad to see you support the use of mathematics in addressing some political questions, even it statistics is a bit wobblier than arithmetic.)
sharky
well the one i remember most fondly is a certain confusion about the significance of a one point change in the pH of the oceans. but i have to say re your comments is i wish people would not bring their children to class.
well, CoRev
the heat comes from the sun, but it is trapped by the greenhouse gasses, warming the planet more than would be the case without them. man’s “natural” effect on the planet seems to be leading to a point where life as we know it will not be able to survive. doesn’t mean there will be no life. doesn’t even mean that humans won’t survive. does mean many things will change, not for better.
sharkey
i twisted the metaphor so there is some excuse for you. i was thinking of the people in los angeles who buy ferraris and then don’t change the oil.
pax
i more or less agree with your ethics, but i think your facts are not quite up to snuff. there aren’t that many people who could would who aren’t. and those who are on the dole aren’t getting all that much. i would prefer to see a system that “made work” if it was real work, for people who can’t find work on their own.
but the problem we are having today is not too many people on welfare… and SS is not welfare… but simply that the people who have money don’t want to pay the taxes needed to pay for what they want from government.
Coberly,
You can’t continue to push the politics of the AGW debate, unless you put together a strong arguement to defeat the other sides arguement. They aren’t “deniers” because of politics, unlike the otherside, they are “denires” as you put it, because nothing has been proven to them, which diverts the debate to politics instead of science.
Until science can back the claims of AGW believers, it is a political dicussion, and the “Deniers” have every right to question.
just to be clear
i regularly disagree here with the “soak the rich” crowd. i think the rich need to pay a fair (progressive) tax, but I don’t think the answer to every problem of the poor is to take the rich man’s money and give it to the poor person.
“owe to their retirees as part of their contractual obligations”
Just because it’s a contractual agreement doesn’t mean it is deserved.
ah yes, the bad old unions made the state an offer it couldn’t refuse.
Jazz,
The public is not “unwilling” to pay for it, but if the agreement is unreasonable and un-necessary then it is not the public who’s problem it is. It is the problem of the people who are recieving the unreasonale benefit, which will surely be cut short.
When that happends, you can’t blame the public who’s money actually went to attempt to fund the unreasonable benefits.
Check where the innovation came from (e.g., Bell Labs, IBM) and the pace of innovation (dial phone several decades, push button phone two decades etc.). Progress has not been steady, it has accelerated significantly.
Tax rates are certainly not the only factor, but the 60s and 70s were dominated by the big old players and entrepreneurship was tougher.
Basic managerial accounting.
CoRev
it’s hard to decipher anything when you have your mind made up as to what the answer has to be.
even after Nancy explains it to you, you still ask “why do the analysis at all?” Well, to cast doubt on the tax cuts for all reasons, tax cuts for all seasons, conventional wisdom, for one.
no coRev
your logic amounts to “if my shoe is untied, the answer is to tie it as tightly as i can, choking off circulation to my foot, and making a knot i can’t untie, and tying it to the roof just to make sure.”
sharky
the science is pretty conclusive. except to people who don’t know a damn thing about science. or much of anything except except to keep repeating “not proved not proved not proved” because they read it somewhere.
shakey
the reason we have contracts is to limit the endless argy bargy over what is “deserved.”
Plus one more element — in the 30s families were larger than today, far more lived in rural areas, and even in cities there was wiggle room for keeping livestock and working very small odd jobs.
These add up to more wiggle room outside of the cash economy. Children of poor parents often had a grandparent’s or uncle’s farm to be lodged at when things fell apart at home, wild game could be shot and firewood gathered or cut, hired men could live in the barn and trade their labour for meals and shelter. Small towns could afford teachers because they, like the hired men, could be paid a pittance and lodged and fed by local families (probably not in the barn, though.) Spilled coal in the summer and spilled ice in the winter were picked up by the kids.
I will agree that America today is far wealthier than before the depression. But where’s the wiggle room? Grandpa’s farm is now a friend’s sofa, and you can’t keep a few hens out back, or gather spilled natural gas down at the railroad tracks. The economy for the average person is much larger (yay for central heating and good plumbing) but also more brittle. And if your chunk of the economy snaps off, chances are fair that your (much smaller) extended family has also reached the end of their glacier and don’t have a spot in the barn for you.
Noni
“” Whose going to pay for it!(?)”” Pax
Funny how so many are concerned with who is going to pay for all this or that, but so few seem to be concerned with who received so much of what was spent. That’s the answer Pax. Those who have benefited the most from the government that they seem to disrespect so much (or is that a rouse?) Whose income is the government so intent on protecting? You can’t determine how much tax, and from whom, is the right amount to collect if you don’t take into account who is receiving the greatest benefit from the system that is costing so much to maintain.
“Whose going to pay for it!(?)” Pax
Funny how so many are concerned with who is going to pay for all this or that, but so few seem to be concerned with who received so much of what was spent. That’s the answer Pax. Those who have benefited the most from the government that they seem to disrespect so much (or is that a ruse?) Whose income is the government so intent on protecting? You can’t determine how much tax, and from whom, is the right amount to collect if you don’t take into account who is receiving the greatest benefit from the system that is costing so much to maintain.
“These add up to more wiggle room outside of the cash economy.”
This statement caused a little bell to ring in my head. There’s plenty of empty space there, as my wife will attest to. The cash economy. Why does no one ever address this issue when the talk is of taxation? In the work I do I see a lot of “small” business people who spend large and earn a pittance. From time to time I have to remind a guy that the bank won’t lend him $80K to buy that cdar if he enters $75K in the income blank on the application. The other side of that coin is the many “small” business people, professionals included, who expense some pretty luxurious transportation through the business. “Our accountant only allows us a lease payment of $1,300 monthly.”
There seems to be an awful lot of income that’s escaping any tax at all. I love the concept of selling a guy an $85,000 Hybrid and the government allows a tax credit of $1,800. There can’t be too high a top marginal rate. No one is going to pay it any way.
Sharky–That was a gratuitously nasty remark. It won’t do. We have disagreements here but manage to keep on topic. I suggest you do the same. NancyO
KH and Mike said: “As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will grow more slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut….”
My first highlight is to make the “Well Duh!” point. Since Govt spending is an important part of the economic calculation any surge in that spending will show an increase over that spending not happening. Oh, and that rate increase should correlate highly with the spending rate increase. Of course we could refine the Duh moment with discusssion of multipliers and differences between the rates of change, but it still remains: Well, Duh!?!!!
The more interesting finding is the second highlight. Taxes up = slower growth! But, Mike still wants us to think that his model supports his theory: “To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent.”
Why is that interesting? Because even Mike and his model believe that you can not get there from here! It will take either one very large tax increase or several/many smaller tax increases. Both slow growth. The several/many option slows growth for an extended period. The one large increase option slows growth deeper (causes a recession?), but may not last as long. Whoopee!
The funny part of this analysis is that Mike proves the value of Reagan/Bush/Obamaonomics. Increase Govt spending without the economic shocks/risks of increasing taxes.
Beautiful.
I’m new here so if you’ve addressed these items in previous posts I apologize:
1. After WWII the US was basically the last major economy left with undamaged productive capacity. Surely that had a rather large effect on our growth rate quite independent of any of the variables you list, including the top MTR.
2. Also after WWII with Bretton Woods, we had fixed exchange rates. How might that have affected growth before and after 1971? So much of what we observe about different growth rates, inequality, etc. can be traced to the 1970s and the most obvious, large change of that time was the end of Bretton Woods.
3. If MTRs only explain roughly 1/3 of the variance in growth rates wouldn’t your – and our – time be more profitably spent working on the other 2/3? Or is this just about winning an argument and proving that your political tribe is better than the alternative? If that is the case, tell me now so I won’t waste any more of my time here.
4. How do you account for the relatively narrow range for tax revenue as a % of GDP over a wide range of MTRs? You seem to be implying that greater government involvement in the economy produces higher growth rates but if the higher MTRs don’t produce more revenue, can that really be true?
I’m not necessarily opposed to higher MTRs on the upper income levels but I suspect there are other more important factors involved. It seems to me that what we are really talking about here is not just economic growth but the larger debate concerning wealth and income inequality. Or to put it more simply, what we are interested in is a society that is fair to all its members. If that is what this is really all about, I would politely suggest that the whole debate about MTRs is a misdirection by the powers that be. In fact, changes in MTRs are a boon to both politicial parties and the lobbyists who feed them. How much cash has the Republican party raised in the name of fighting higher taxes? How much has the Democratic party raised in the name of raising those same taxes? Maybe the real causes of our problems lie elsewhere.
KH said: “I would happily believe that the marginal tax rate does not drive economic performance. If we accept that view, then we are free to use the marginal tax rate to pursue other goals, such as reducing the deficit and redressing income differentials.” Exactly, except we are already doning the redistribution trick. With Dem/Obama suggestions that ~65% marginal tax rate would only apply on those who make >$250K. Then we have AMT2 on top of AMT. What a thought. The unanticipated consequences of class warfare.
KH also said: “What we can’t honestly do is claim that marginal tax rates are important when selling tax cuts, and then claim they aren’t important when data show that tax hikes might produce better results.” I know of no one making the latter claims, but many that make the first claim. Oh, and that includes you and Mike.
Let’s just put aside the misdirection.
You claimed that Mike was calling for tax hikes to end recession. I pointed out that Mike had already made clear that was not his point. Either you didn’t understand what Mike wrote, didn’t bother to read it, or pretended he had not written it.
I pointed out to you that your sneering nonsense ignored a statement Mike had already made. Your response is just wierd, but let me help you through this.
Sometimes, you can’t have everything. Sometimes, you make short-term sacrifices in service of long term gains. If, as Mike finds, a higher tax rate than we now have is optimal over the long run, then you raise tax rates. A wise policy maker, one who is not just throwing dust in the air to keep people from pursuing optimal policy, minimizes short-term harm while pursuing long term improvement. Like hiking taxes when growth is at trend or better, or hiking taxes on high savers when there is a shortage of demand, but leaving taxes on those with low savings rates alone. Your argument is essentially the standard modern GOP argument – if tax hikes can cause any slowing in growth, ever, then tax hikes must never be done. We raise the Fed funds rate to slow growth. The GOP urges spending cuts, and we know that those slow growth in the short term. We make policy choices pretty often that tend to slow growth. The modern GOP has created the fiction that taxes are magical. Mike has shown that they aren’t. Since taxes aren’t magical, we have reason to find out how they affect the economy, and use that knowledge to our advantage. Why do you want to stand in the way of such knowledge?
Seems to me that the existance of the Kimel Curve (shape) is the first issue, and then the peak is the second issue, for policymaking. Kimel (and Wells in the comments here) have offered an hypothesis on why the general shape should be expected. It makes sense, but it probably ought to be the subject of research if this hasn’t happened already–e.g., do entities subject to the top rate behave as claimed. If the behavior and curve is real, then the peak should be closely examined. Maybe commenters are right that changes over time have shifted the curve to the left, and Kimel needs to consider more in the theory and model to capture this shift–an important hypotheses to be considered. Regardless, the Kimel Curve potentially offers a simple, policy-relevant model that can replace and improve upon–not merely discredit–the model/myth that lower top tax rates promote economic growth.
Than heaven for those GHGs. They, by many estimates, raise the earth’s temperature ~33K (That’s Kelvin.)
Dale said: “man’s “natural” effect on the planet seems to be leading to a point where life as we know it will not be able to survive. doesn’t mean there will be no life. doesn’t even mean that humans won’t survive. does mean many things will change, not for better.”
Dale’s bought into the myth hook line and … while claiming not to be a “tru bliever”. The myth is that warming is better than cooling. You see, climate is the definition of change in long term weather conditions, so stasis is not even studied nor possible. So if you believe Dale and the myth, living in a Hawaiian climate is worse for us than polar climes. I use those examples as they represent the extremes with the warmer climate being the tipping point into (fill in your own catastrophe here.)
Don’t remenber whose gag it was, but it ran along the lines of:
Cop 1: “He died a natural death.”
Cop 2: “A natural death! He’s got a knife sticking out of him!”
Cop 1: “It’s perfectly natural to die when you have a piece of metal stuck in your heart.”
Sticking knives in people may lead to a “natural death”, but sticking knives in people is discouraged. If the standard is that we do something, and that something leads naturally to a bad consequence, that doesn’t really add up to “So it’s OK to do it.” The terms you’ve set up for “It’s natural, so it’s OK” could justify recreational nuclear war.
As long as you continue to pretend that Mike’s comments all had to do with the same time frame, you can keep chasing your tail. Be honest. Admit that Mike wrote what he actually wrote. Then we’ll have something to talk about.
While we are on the point of you pretending, I’ll point out another bit of nonsense in your latest response. The fact that there is already progressiveness in income tax rates does not mean we cannot make them more progressive. There is huge additional opportunity for redistribution. We should get busy.
KH, putting aside the conservativexs are against science spin with your: “Since taxes aren’t magical, we have reason to find out how they affect the economy, and use that knowledge to our advantage. Why do you want to stand in the way of such knowledge?“
What I did say was: “So the pattern I am seeing is one of an economist locked into a simple theory to completely explain a complex system without the barest of understanding of causation.”
So it is actually you who is providing the misdirection.
CoRev –
You said:
Mike, so you are proposing that a total tax rate of ~78-80% is the optimum for growth. Oh, wait. 47% of the tax payers do not pay federal income taxes, so that rate only applies to the upper 53%. Moreover, to believe Mike’s analysis, he asks us to blindly believe that marginal (federal) tax rates drive the economy.
Once again, you have demonstrated how your cast-in-concrete mind set contributes to your lack of reading comprehension. Hints – search for the value “17.6%,” for starters; then ponder the meaning of “total tax rate.”
Further, Mike, to my knowledge, has never asked us to blindly believe anything. There is usually a ton of data and statistics, along with a rational and coherent narrative. So that statement is utter nonsense. Disagree if you like, but please say something rational that is either illustrative or helpful. Any destructive moron can stand on the sidelines and throw bricks. (BTW, Note that I have not called you a moron. That was an illustrative elaboration. OTOH, I do think your intent is to be destructive, which is why I have no patience with you.)
The more interesting finding is the second highlight. Taxes up = slower growth! But, Mike still wants us to think that his model supports his theory:
Either you’re cherry-picking or you have no grasp of context (not mutually exclusive propositions by the way.) Or, it might just come back again to lack of reading comprehension.
You desperately need a better method of discourse than simply misrepresenting what someone says, then arguing with the misrepresentation. Either that or use more bold, so we’ll know that you’re shouting. Are you totally oblivious to how badly you are embarrassing yourself, or do you simply not care?
Anyway, hope you and Mrs. Rev had a joyous Christmas, and i wish you a happy and prosperous New Year!
Cheers!
JzB
Sharky. The states’ negotiators agreed to the pension systems’ provisions at the time. There have been many opportunities to renegotiate in the interim. Now all of a sudden it’s some sort of Union and employee scam? Won’t fly, Sharky. Incidentally, “who’s” should be “whose”.
Sigh!!! Lord protect us from the high minded liberal redistibutionists, for they know not when we are out of other peoples’ money.
KH, your task now is to relate the knife to a proven CAGW claim. Your knife gag could entail “self inflicted.”
Pax–Think about what you are saying. We all worked for what seems like eons looking back and paid our dues. We repaid our student loans, we paid our state, local and federal taxes and lived by the rules. All of a sudden we’re greedy geezers?
I don’t remember a single day as I was slogging it out in the SSA trenches when anybody cut me any slack for any aspect of my work or conduct. Rather the reverse! When the political appointees my my agency were flying first class, I was trundling around in the cheap seats with all the rest of my civil service peers. If you’re looking for someone to punish, don’t look at the people who paid the taxes that kept the country afloat when others thought they oughta get a pass on that odious duty. We’re not the problem. And as long as we’re around, you can bet we’ll be paying our dues.
Garbage. Do a cross-sectional time series analysis across countries and see if you get anything remotely close to 65%
You need to explore omitted variables.
Actually, since the contracts were freely entered into, one is tempted to believe that they might actually be deserved. Otherwise, why would the States agree to them? And, as has been demonstrated many times – possibly here, I don’t recall off hand – the typical government employee makes considerably less than her/his counterpart in the corporate part of the economy.
Also, let’s consider who those gov’t employees are. You might think that grouchy person at the Secretary of State’s Office or the slow-moving County Road Crew doesn’t deserve her/his pension, though I’m sure your level of comprehension about their job responsibilities and working conditions approaches absolute zero – but what about policemen, firemen, teachers? To hell with all of them – eh?
That is the sort of attitude that makes us angry liberal angry.
Cheers!
JzB just another baby-boomer leach on society
Joseph, well said: “If MTRs only explain roughly 1/3 of the variance in growth rates wouldn’t your – and our – time be more profitably spent working on the other 2/3? Or is this just about winning an argument and proving that your political tribe is better than the alternative? If that is the case, tell me now so I won’t waste any more of my time here.”
Sharkey … if a business enters into a contract, including a pension arrangement, which they privately believe is too large and therefore never undertake to pay … sounds like long term premeditated fraud to me.
Most people have only one little tumbling brook of time, energy and skill with which to pay their way in life, which they cannot store or save up for later. You seem to be saying that once their stream dries up, it’s just fine for their debtors to tear up contracts and run away laughing.
Noni,
No…I’m not saying that! No one believes that public sector workers in California, for example, don’t deserve a pension, just saying the pipe dream of the pension that was agreed upon was unreasonble, and now the people who provide the tax money to supply that pension have to go down with them…Nobody won!
Lesson to be learned here for the future!
Welcome Joseph, drag up a chair.
IMNSHO, if the Kimel curve is useful to explain 1/3 of effects on growth it’s ahead of the pack compared to many other econ theories, which seem to always start well but then have to be shimmed with the phrase “um, it’s complex”.
Also, this is just one of many of his data sets going back sheesh four or five years showing that one way or another, trickle down is just plain wrong, with effects either neutral or opposite to those claimed.
Your points 1 and 2 need to be remembered, thanks for posting. Gotta dash, but glad you’re here.
Noni,
I think there are two contributing factors that are not that complex at all that explain at least as much as tax rates: volatility of monetary policy and political corruption.
The role of monetary policy in producing inequality is particularly interesting and again I don’t think it is coincidence that inequality started to rise when we came off Bretton Woods and entered a period of more activist monetary policy. Periods of currency volatility produce effects that benefit the wealthy and exacerbate inequality. In the 70s and the ’00s with a falling dollar wealthy individuals protect themselves by owning hard assets while the poor see their basic goods (food and energy primarily) take an ever rising portion of their income. In the early 80s and late 90s with a rising dollar the wealthy owned stocks which responded positively to disinflation. While the poor and middle classes may not have been hurt outright by the disinflation they were hurt relatively as the wealthy owned stocks prior to the disinflation. In other words they benefitted first and most.
As for political corruption, I think there is a good reason that higher MTRs don’t generate more revenue. The wealthy have the means to influence the tax code to their benefit. Raising tax rates merely provides an opportunity for politicians to extract a little more rent. That’s why I think this debate is mostly pointless and designed to distract us from the real problem.
no, co rev. hawaii has its climate, kansas has its. you can’t grow wheat in hawaii.
“The fact that there is already progressiveness in income tax rates does not mean we cannot make them more progressive. There is huge additional opportunity for redistribution. We should get busy.”
You’ve made the assumption that by increaseing the progressive on the top end produces the more favorable outcome. Why didn’t make that same assumption by reversing it, and making less progressive on the low end?
It exposes a real bias, and don’t pretend Mr. Kimmel even remotely gets covers that analsis in this post!
calhoun
yes there are other causes, but we can only talk about one of them at a time. if that is a waste of your time, you won’t be missed.
Coberly,
When the state legislators and the union have not only the same political agenda, but the same leftist philosophy, there wasn’t even’t the possiblity of much disagreement.
“You can’t always get what you want!”- A Rolling Pebble
California is getting what it asked for….Am I supposed to feel sorry for them?
Social Security is a supplement to retirees, and medicare is a social security safety net for the elderly. They are meant to be a last line for defense for those that aren’t fortunate in society that have the leisure to “save” “plan” for retirement.
Most government employees in our nation that have worked over 20 years with a pension will have a much better retirement than any middle class person can dream off…
My comments aren’t directed to retirees, my comments are directed to a responsible governance of other people’s money! If we as a nation don’t self police well, in the very near future there will not be a social security and/or medicare as we know it.
None of the good progressive ideals nor the independent self determination worshipped by the right will be any use… If you ever lived in a “second” world country such as Ukraine, Russia etc. You will understand… They have the technological know how, the education, the “free” hospital etc. But it’s just a shell… No real, hard goods(real money) to pay for it!!!!
Sharky-
In what way is the CA pension system unreasonable?
Got facts and data?
Cheers!
JzB
CoRev –
Until somebody does the work, we don’t know if it’s 1/3 the variance, 1/10 or 99/100, do we.
Or is this just about winning an argument and proving that your political tribe is better than the alternative?
You are also totally tone-deaf to irony.
If that is the case, tell me now so I won’t waste any more of my time here.”
If that’s what it takes, consider yourself told.
Happy St John, the Apostle’s Day.
JzB
Nancy:
“If you’re looking for someone to punish, don’t look at the people who paid the taxes that kept the country afloat when others thought they oughta get a pass on that odious duty. We’re not the problem. And as long as we’re around, you can bet we’ll be paying our dues.”
This is actually what I am trying explain about accoutability, just think about when they try to rise taxes on you!!!
I am not talking about people whom acutally pay their taxes, I am talking about people whom skip taxes-your politicians whom takes your money, and the wall street who don’t pay any taxes.
The only people they raise taxes on is the people whom are actually pay… That might be you Nancy!! LOL
As for government pensions- like I said, there needs to be acountability. Too many instances of double dipping, insane pension benifits… That’s why there’s a backlash against it. Do you categorize all people on government pension as “bad” just like the same that we should tax the “Rich” or we should exempt the “poor.”
There needs to be a very sober look at these issues. Honest, frank discussion should be in order, instead of blame game. Especially the right versus left… I think both are correct, but needs to be “fair” “accountable” “sustainable”
Remember the spirit of Teddy Rosevelt when he establish the national park, make sure we have a functional forestry service, bureau of land management so that we have perpetual wealth for future generations of Americans… “Accountability”
Krasting has his own data sets. Based on what no one seems to know. But clearly more informed than those of the losers at SSA, CBO, and OMB who prolly should be upgrading from those Tandy 64s, at least to an IBM 1086.
CoRev the Economic Right has spent the last thirty years EXPLICITLY arguing that investment by ‘Producers’ is driven or discouraged by small changes in top marginal rates. Your point being?
The scam ain’t proven. Except in the minds of people who think random e-mails about establishing the limits of discipline authority, something that has gone on since Galileo was dismissed as a freak are evidence. East Anglia was a conspiracy in much the same mode that LaRouchites insist everything can be explained by a strategic alliance between the Queen of England and the Rothschilds. It is not that Lyndon’s folk have no evidence or lack a reasoned argument, it is just that the preponderance of evidence is against them.
Whether talking climate science or the relative reliability of Iraqi War embeds (who saw and more importantly reported only what Don Señor wanted them to) vis a vis more independent and even MSM media you reflexively came down on the side of the Republican favorable talking points. Almost like you had an apologist agenda. Yeah I know that is crazy given all the counter examples of honest—. Gosh like many here I must of missed those.
I do give you credit for being dogged in the face of abuse, it taking courage to continually going up to the scratch line even when your record as a fighting dog is about 2-25. “it ain’t the dog in the fight, it is the fight in the dog’. Your masters must be so proud, if perhaps mystified that you are still withstanding the abuse. I mean even FA went down to defeat as ultimately did PRS before him (though Roland had a good run) but heck you are still up and fighting.
Props! I think. But it has got to be a hard way to pursue your agenda.
Sparky with a snarky, in movie or not ‘Tulip Bulb’ is a reference to fricking economic history. Maybe you think a reference to the South Sea Bubble is just to the lighter sides of the musical turned movie South Pacific.
Maybe you could look up ‘Gin Craze’ and so find out it has nothing to do with Tom Cruise in ‘Cocktail’
Norman you are a good man who needs a calendar. Boomers conventionally are those born between 1946 and 1964. Not only wern’t most of us not old enough to serve in Constitutional office in 1980, a significant number of us were not old enough to vote. Don’t try to pin the excesses of Voodoo Economics on us, on a calendar basis Boomers are only beginning to move into the higher corridors of power now. In time to rescue this country from the sad sack, accept authority generation known as the Silent Generation (roughly 1928 to 1946 birthdates (excepting my Mom of course who is not to blame for any of this)).
With a few exceptions the Greatest Generation is leaving the scene. Allowing the Silents to play divide and conquer between Boomers and Gen-X. I cry bullshit.
Pax you too could buy a calendar. The oldest Boomers have not even know reached FRA ( full retirement age) 1946 plus 66 equalling 2012. The idea that our current deficits are do to payments to Boomers being to be polite calenderically challenged.
Pax all I can say is that you have funny methods of punishing Wall Street.
Worstall are you arguing that none of that buying stuff to blow up stuff spending didn’t persist to post-war years? Both the civilian airline industry and the whole computing/electronics advancements have their solid roots in WWII tech developments. Even the Interstate System both here and in it’s progenitors Hitler’s Autobahn had their origins in the need to move the military rapidly. I mean that while Eisenhower made an indelible point highlighting the Military-Industrial Complex when push came to shove Interstates were the result of The National Defense Highway Act (or something similar)
Why work when wages are so low you can’t afford to fed your family. The argument for cutting the tax rate was to boost the economy. The economy instead of growing fell. The experiment should be now over. Time to put it back were it belongs 90%. 57% might be optimal for economical growth but 90% would be optimal for repressing the growth of the oligarchy.
Welcome Joseph! (as usual late to Noni). But IIRC German industrial capacity at the end of WWII was pretty much more than it had been before total mobilization of industrial capacity despite Strategic Bombing. The three western occupiers left that capacity largely in place which is why West Germany became one of the richer economies in Europe in pretty short order while the Soviets just dismantled and exported that capacity in that part of Germany under their control.
In order for your argument to hold you would have to show better relative advances in the U.S. For the middle class compared to Western European democracies after discounting for repayment of war loans. (If you read post war British fiction you wonder why whiskey is so ‘dear’ while Americans were swilling down Scotch like it was Bourbon. The answer is that Scotch Whiskey was one of the few products Britain had for export and they starved the domestic market to maintain foreign exchange.
Otto please do and then submit it here.
Mike K though a former owner/manager of this site doesn’t have keys anymore. But for my sins I still have powers to put up any guest post I want. Send it to me..
Mike, would it be hard to substitue real gdp per capita in your regression? A better measure of prosperity, of course, and an easy way to remove a confuting factor.
Would especially love to see it for GDP/hour worked. (Let me know if you want me to pull the data. I have it handy.) This is usually used just as a measure of labor productivity, but 1. it reflects the value of leisure time in a somewhat back-door way, 2. productivity is the magic bullet, and righties love to say that taxes kill it, and 3. it really represents the fundamental comparative advantage equation by essentially valuing goods in hours worked.
Since we’re thinking that higher marginals encourage businesses to invest internally in productive assets (plants, equipment, software, training), and those investments theoretically increase labor productivity…
“From this output, we can see that this version of the Kimel curve (I do like the sound of that!!) explains 36% of the variation in growth rate we observe, making it twice as explanatory as the previous one. The optimal top marginal tax rate, according to this version, is about 64%.”
I’m giving Kimel the benefit of the doubt here but I rounded. Sorry I didn’t use the exact figure.
I’m just tired of the sniping between Ds and Rs. It’s stupid and accomplishes nothing. I’m interested in real solutions. Raising the top rate to 65% may make you feel all Robin Hood but if it doesn’t actually address the problem we’re trying to solve then it doesn’t mean squat. So my question remains: is this just about the same old political power bs or is this a forum of people really looking to figure this stuff out? If it’s the former I’m not interested and I’ll move on. If it’s the latter I might have something to offer and I’d like to see what you have as well. So which is it?
You might be right Bruce; I don’t have the data at hand but my impression was that large swaths of Europe were pretty devastated which is why we had the Marshall Plan and all that. As for relative advances of the US middle class versus Western Europe I think that would depend greatly on how you measure such things as quality of life which are pretty subjective things. I do know that the position of the dollar as the reserve currency certainly gave us a major advantage. That’s why d’Estaing called it our “exorbitant privelege”.
Anyway, my only point was that there were some other things at work in that post war period for which we can’t control. Likewise for that period after 1971 when Bretton Woods finally collapsed. The fact is that MTRs have been all over the map for much of this period and while we got different growth rates we didn’t get signficantly different revenue as a % of GDP. That sounds like a disconnect to me that implies other factors at work.
Coberly,
I think to talk about only one at a time is exactly the problem with a lot of economics. I’m not disputing his findings. To the contrary I find them quite interesting since like so many other things in economics the results are counterintuitive. But to pretend that we can actually control for all the other variables at work is hubris and may lead us to wrong conclusions. This is one piece of evidence that points us in the direction of higher MTRs but what if those higher MTRs are only effective if they occur in the proper context? Which is exactly my point by the way. A lot of that economic stability we had in the post war period can be traced to Bretton Woods. Just to use one example; we know that commodity volatility is greatly reduced with a fixed exchange rate. I don’t have the studies in front of me but my recollection is that under a gold standard the standard deviation of a typical commodity index is roughly half what it is under a floating exchange rate regime. That’s significant and has major economic ramifications. With lower commodity volatility you drastically reduce the need for hedging activity which reduces the need for derivatives and frees up capital for more productive uses. So what if the higher MTRs were only coincidental and it was the fixed exchange rate system that produced the higher growth? Or maybe it was a mix. I don’t know the answer yet but I would think it is pretty damn important from an economic standpoint to find out before we go doubling tax rates. So, sorry but I can’t think about this in isolation. It doesn’t work.
“The economy instead of growing fell”
No it didn’t…it recovered from a recession in the early 2000’s, and continued to grow up to 2008!
Hey Steve! We need to kick this around with more wings and less trivia contests. Eastlake rules! (and Montlake Alehouse drools as far as Drinking Liberally goes).
I really want Wall Street to feel the pain… But I guess they still got their tax exemptions!
Baby Boomers starting in 2011 will get hit with additional capital gains tax when they sell their house for retirement… 2.5% its in the Health Care Bill… LOL
This would get maybe a b+ in my intro metrics course. I hope you don’t have a phd, it’ll make the rest of us look bad.
Joseph Calhoun,
I don’t have time to address your points…. gotta get ready to go to work. Most of them have been addressed. As to the fact that the MTRs only address a piece of the pie; yes, I plan to try to improve the model in the coming weeks. But many of the other things aren’t as easy to deal with as tax rates. Thus, getting tax rates right is the low hanging fruit, so to speak. It pays to understand their effects well.
Congratualtions to m.jed, whose regression clearly shows that real GDP is higher today than it was in the 50’s, 60’s, 70’s 80, and 90’s. What it does not, and cannot, delineate is an underlying correlation between the current marginal tax rate and the growth in real GDP.
I will bet that the lagging ln(Real GDP t-1) explains most of the current ln(GDP t). Doh !
Congratualtions to m.jed, whose regression clearly shows that real GDP is higher today than it was in the 50’s, 60’s, 70’s 80, and 90’s. What it does not, and cannot, delineate is an underlying correlation between the current marginal tax rate and the growth in real GDP.
I will bet that the lagging ln(Real GDP t-1) explains most of the current ln(GDP t). Doh !
Congratualtions to m.jed, whose regression clearly shows that real GDP is higher today than it was in the 50’s, 60’s, 70’s 80, and 90’s. What it does not, and cannot, delineate is an underlying correlation between the current marginal tax rate and the growth in real GDP.
I will bet that the lagging ln(Real GDP t-1) explains most of the current ln(GDP t). Doh !
The coefficients on (a) and (d) were positive and statistically significant, the coefficient on (b) was negative and statistically significant and the coefficient on (c) was positive but just barely missed the significance threshold.
You may be right Mike but I’d just warn not to work from preconceived notions. If you go in wanting higher MTRs you are likely to find ways to justify them. Again, I am not necessarily opposed to higher rates but I think the effects may be weaker than you think unless the higher rates are accompanied by other policies. I also get pretty uncomfortable with any rate over 50% for reasons of freedom. To think that we as a society have the right to take over half of what someone else earns – even marginal earnings – really feels wrong to me no matter the economic efficiency effects. But no doubt you’ve intrigued me and I’ll be back. I’d really like to see you try to incorporate the effects of monetary policy, particularly currency volatility, into the model. I think you’ll be surprised by the findings.
well…we are close if you look at full tax rates and weight it vs state gdp or population. Income + state tax plus sales tax is often around 60%
Sharky:
Yes, I am expecting to be taken seriously. While I don’t expect humor to work with everyone, my point is that speculative bubbles are the symptom of an economic system where there is little basis in reality.
Is a Tulip Bulb all that different from a “CDO” particularly when the “investor” is buying it only because he is betting that someone will buy it from him, either directly or in the form of yet anotherr derivative, for a higher price without regard to what the actual produce represents?
Listen to the language being used to describe “The Market” — all of the terms in common parlance are straight from the casino! What happened to the language of investment and actual capitalism? We talk about an economic recovery but we use the language of somebody who should be going to Gamblers Annomous meetings.
Everyone is looking for the next big killing (a.k.a., bubble) not the next real opportuity for capitalism and investments to work.
Isn’t this a rather simplistic analysis that assumes the only determinant of GDP growth is marginal tax rates? So the level of regulation in the economy, size of government, levels of government debt, strength of education, immigration and our economy vis a vis our trading partners have no bearing on GDP growth (and the level of taxation our economy can support? As I am sure Mr. Angry Bear knows, correlation does not imply causation.
George Wells
yes, that’s about my take. but why then do real economists endorse such a view, and why does the President adopt policies that assume the casino is what drives the economy.
and why do some liberals want to have social security financing depend on a tax on the winners of the casino economy.
and…. this is in reference to Bruce’s post re the hundred million dollar Picasso…the sale of that Painting does not in itself mean anything to the economy… but it does suggest that something is wrong with the economy when someone has a hundred million dollars he has nothing better to spend on than a painting which has no intrinsic value other than what other people with too much money might be willing to trade for it.
Bruce
i think i may agree at least a little bit with norman, though i agree with you it is nonsensical to “blame” boomers for the decisions of the criminal class that we call our leaders. i believe that americans came home from world war two determined to make the world a better place. and by and large they succeeded. i don’t think their kids had quite the same motivation, and the ease with which hippies became yuppies suggests to me that the moral force behind the sixties was from people at least a little bit older than the kids themselves.
this is not to “blame” them. human beings can only react to the environment they find themselves in according to a kind of law of mass action. even today the boomers can claim credit for some real advances in civilization (the end of racism as we knew it, if not the end of racism as a fact of human psychology) but they have, it seems to me, fallen into the kind of mindless pursuit of wealth that characterized the wealthy of previous generations… in a sense we have all become members of the idle rich class. which is turning out to be unsustainable, even as it was never really “good for us.”
pax
the fact seems to be that about 80% of old people fall into that category of “aren’t fortunate enough to pay for retirement.” which is why Social Security was invented as a way for those 80% to save their own money protected from inflation and markets. Your mistake is that you believe the propaganda that tells you “we” are paying for “them.” They paid for themselves.
Those government employees with good pensions paid for them by taking smaller pay while they were working. No reason the rest of the workers couldn’t have done the same, though they would have had to find a way to protect that deferred compensation from market failures. Look at how PERS works and you might be able to see how that could work. No reason that PERS type contributions have to be limited to state employees. Now that’s not the whole story…. but the complications can be worked out once you accept the basic idea.
Calhoun
what it is is that you hear only what you have created space in your brain to hear. there is plenty of non partisan bickering going on here. and only a few who insist on dems v repubs world view. if you have something to contribute, put it on the table. but pretending that we don’t just tells me that you have a hearing problem.
for one thing, Kimel is not, I think, proposing a Robin Hood tax. I certainly argue against such an attitude all the time, though i do think a 3% increase in tax rates right now would do us all a lot of good.
calhoun
so while you are addressing one thing, keep the others in mind. even i have suggested as much. in fact the take i take from Mike is that it is a mistake to focus on “optimum tax rates” because we get ourselves into a morass of self deception when we go down that route. i am willing to pay the taxes to pay for the stuff that got us here, and to pay the taxes for stuff that we need down the road… after careful consideration of what it is we need. what i get tired of hearing is the constant chant that we need to cut taxes or the economy will collapse.
“feels wrong”
aye there’s the rub. no matter that we could pay 90% tax and not really suffer any injustice… remember that it’s Caesar’s money… we are in the habit of looking at our “income” as “our” money and resent taxes for any reason. i don’t know a cure for this, and it may be the rock that sinks our little ship of state… because while like everyone else i would like to see lower taxes, i think there is a time when it’s all hands to man the bailing pump. and this is such a time.
This is an awful lot of conversation regarding the effect of tax rates on over-all economic performance. One might think that the purpose of collecting taxes is to fine tune economic performance. Funny, I thought that the purpose of taxation was to pay for governement activities. The value of Kimmel’s analysis, and any others like it, is that it provides an alternate perspective regarding the so-called dangers of taxing too much, but that entire discussion is a distraction to the primary purpose of taxation. That is, as noted, to pay for government activities.
The argument, or discussion as it were, should be about how much tax revenue is necessary to cover the cost of government activities. Part of that discussion might then focus on a benefit analysis of those activities. Which sectors of our economy gain the greatest benefit from government activities? Answer such questions first and then the appropriate rate schedules will become self evident assuming that we all agree that those who benefit most from government activities should pay the greatest share of the cost of carrying out those activities. Again, this is not to say that Kimmel’s analysis isn’t worthwhile. It is a necessary response to all the efforts to reduce taxation on those who have certainly been garnering the greatest benefits from their governments activities. Pay your fair share of taxes. It’s the most patriotic action you can carry out.
coberly,
Not suffer any injustice according to whom? Caesar’s money? If you truly believe that what we earn doesn’t belong to us, we don’t have anything more to talk about. I don’t think raising the top rate a few percent is going to hurt us either and may in fact do some good but that isn’t what this post is about is it? This post attempts to justify a top MTR of 65% based on nothing more than some regression analysis of a few variables in a complex economy where there are thousands of such variables. I’m sorry but that isn’t enough to convince me that we have the right to take over half of what anyone earns. I’ve put forth a few ideas about variables that I think are at least as influential. So far I haven’t seen anything from you but a lack of capital letters and punctuation. As for the politics, well I didn’t write the tag line that says “a slightly left of center economic commentary” and I’m not the one who included “Republican President” as one of the variables to consider. That’s why I’m wary of the message and the messenger. I’m willing to pay for the government we need but I question whether we need what we are borrowing to pay for now. And before you accuse me of wanting to starve poor people know that military spending is at the top of my cut list. So if you have anything of value to add to the conversation, by all means add it.
The whole thing is silly. The higher the marginal tax rate in the past the bigger the deductions and loopholes. It is much harder, but all needs to be done on some form of “effective” tax rate.
The whole thing is silly. The higher the marginal tax rate in the past the bigger the deductions and loopholes. It is much harder, but all needs to be done on some form of “effective” tax rate.
Schmendrick, an interesting choice of nom de plume, has a point. Does the Kimmel analysis take the fudge factor into account? That is not to say that good government can’t repair the loop hole dysfunctions that have long been a part of our tax systems. Oh my, there I’ve stumbled upon the crux of the matter, good government. Until we as voters start choosing to replace the crapola representatives that we have typically been sending to the Congress nothing is going to change the current, and fifty year old, trajectory of our government’s focus of attention. Prince John and the Sherrif of Nottingham are winning out and have reversed the Robinhood effect of government. Now we steal from the poor and give to the rich. Actually we only deny to the poor as they have nothing to steal. Those who aren’t actually poor have not yet begun to feel the hurt that the economic imbalance will soon enough bring to them. In effect, Schmendrick makes a valid point. The effective tax rates are just what our ineffective government leaders think to be appropriate. A little from there, a little less from here and all in all not enough to cover expenses. Blame the greedy poor for not contributing enough. The very wealthy are doing all that they can be expected to do, for themselves that is.
joseph
if you catch me imputing reasons to you that you have not expressed, please call me on it.
similarly i don’t see Mike calling for a tax of 65%. a mtr of 65% is not a tax of 65%, and i don’t think he is even calling for an mtr at that level. what he does show is that an mtr at that level… ignoring some important factors even as simple as the income level that the mtr is set at… does not seem to reduce “growth.”
i would argue that “growth” is a dangerous measure for how we evaluate our household (economy). but in any case i welcome Mike’s demonstration that tax cuts forever tax cuts may not be the tonic it’s advertised to be.
as for Caesars money, i should apologize, that is a concept that apparently only me and some first century carpenter understand. but essentially, the economy is what it is, in part because of government action, if it turned out that it took a 90% tax rate to give you X dollars of real income, and a lower tax RATE would leave you with less for yourself, then 90% would be the “right” tax rate, even though it would “feel wrong.” it would feel wrong because psychologically you can’t help feeling that your income is “yours” even if it is the product of among other things government. if your oil bill was 90% of what it cost you to produce whatever goody your factory produces, you would wish you could make it lower, but you wouldn’t feel it as a moral problem. if government is what enables you to make your hundred thousand, or hundred million, it stilll “feels wrong” to you to pay a tax… any tax, but you can always pick a number and pretend that’s the magic line… and feel aggrieved because “they” are taking “your” money.
like i said, i don’t expect anyone to understand this. even though it is the foundation of economic mental hygiene.
if you are going to worry about my punctiuation, i suggest you read Archy and Mehitabel. or maybe a Good Book on what’s important in life.
oh, just to compound the felony: there might be times when even a tax rate that reduces your real income (not your apparent income) would be called for.
no. i don’t like to pay taxes either. and i understand that there is some disagreement about just what government purchases are “worth it.”
Since you do not seem to be using GDP per capita, population growth is obviously going to have a significant effect on GDP growth. It does not need to explain all cases of fast growth to be the case.
The growth in the 30s is a singular event. Putting government money into the hands of people who then spend it will cause growth. The depression was a time when that happened more so than ever since.
schmendrick
probably you are right. but as a first, simple, answer to a simple minded but successful political slogan, it’s a good place to start.
now, were those high marginal tax rates associated with “loopholes” that encouraged investment?
The more I think about this the more I question whether this is the low hanging fruit you claim. For instance, you mention that the top rate from 1929-1932 is just 25% and that we had higher growth later in the 30s with a much higher rate. What you fail to mention is that the top rate in the 1929-32 period applied to income over $100k. While the top rate from 32-35 was 63%, it only applied to income over $1 million. Yes, tax rates were higher on lower incomes after 1932 with the rate exceeding the 1929 level at $40k but considering the deflation of the period how many people did it apply to? The top rate of 70% in 1965 applied to income over $200k (M,FJ) and even in 1981 – after a lot of inflation – the top rate applied to income over $215.4k. Ever hear of bracket creep? Reagan’s cuts dropped the top rate to 50% in 1982 but it applied to income over $85,600. Another factor you fail to mention are the number of brackets. The Tax Reform Act of 1986 reduced the number of brackets from 15 to 5. Did you take these facts into account in your analysis? If you did I don’t see it in the data above. I know this is just a blog post and not a formal paper but there is a lot you’ve left out here. So far, you haven’t convinced me.
You have effective tax rates for different levels of income, monetary policies, political policies, globalization, wars, govt. debt levels, unemployment rates, industry concentrations, demographics, quality of education standards. Essentially the question is whether governements are more effective at allocating capital. Over the long run, indications are that this is not the case. The recent example of China will play out over the next several years. This seems like data mining for the mindless, to me.
jb,
Each of the three periods in your data with high (15%) poverty numbers is followed by a period of higher than average GDP growth (per looking at graphs). I did not run any actual statistical analysis, so it cold easily not really be significant.
My theory is that growth caused by government spending (not all government spending and not all growth) is increased by having high value programs. Poverty would be a proxy.
Thinking about it further, electrification was not complete at the beginning of the data and roads have been built into areas previously unserved, so I can imagine many other high (growth) value government programs buried in the data. I would include SS and Medicare, but they are not funded by income tax.
If there is a major factor that is highly influenced by time period, then Mike’s results could also be skewed to the extent that tax rates are not random with respect to time.
Sorry coberly but when the title of the post is “The Top marginal tax rate SHOULD BE about 65%” I have to assume the person who wrote that headline believes what they wrote. Now Kimel may not be the person who wrote the headline so maybe he doesn’t believe that but certainly the owners of the site seem to.
I understand your Render Unto Caesar reference but I’m not sure you are interpreting that quote correctly. But then I’m not a Christian so I’ll defer to you. I agree that a certain level of government is required to maximize welfare but the argument over 65% MTRs isn’t about that. I understand MTRs perfectly well – re-read my post. The level of government debate would center on tax revenue as a % of GDP or average tax rates or some other metric. This debate is apparently about what the highest marginal tax rate should be to maximize economic growth. I don’t think the analysis even comes close to being rigorous enough to make the claim contained in the headline.
The majority of the evidence is that economic growth is best supported by lower marginal rates because of the efficient use of capital. I prefer the idea put forward yesterday on Bloomberh radio by Angle Consulting that advocates a national sales tax (not a VAT). The basis was that this would shift the tax drag to the consumer so that our goods do not have these taxes as a built-in cost. The effect is that by not including the costs in manufacturing, they will be more competitive in international markets. Very insightful.
you are = “you’re” not “your”
Also, a friend redid the analysis and it is entirely a function of WWII. Not sure that completely invalidates it, but it is incredibly unclear that 65% marginal tax rates alone would be helpful…
Schmendrick, nice to hear from you. Say hi to Molly and Lir.
Remember…”If you torture statistics long enough, they’ll confess to anything” ( Iwish I could take credit for the quote)
You might want to show the standard error of estimate on your tax rate: the 95% confidence interval is -35% to 217%. That’s assuming the actual relation is an exact quadratic between top marginal tax rate and GDP growth, and the only noise is constant, independent Gaussian noise on the GDP growth rate. If you check diagnostics, you’ll find none of those assumptions are true, so the actual confidence interval is even larger.
The data do show that very high top marginal tax rates are not inconsistent with strong economic growth, at least at a first look. There are all kinds of issues other commentors have noted that can affect the analysis, of course. But I don’t think you can say much beyond that from the data you have. The regression is just silly.
At the risk of data mining — already threatening the insights you wish to convey — perhaps you could explain how much growth in year T deviates from its near-term average (with appropriate RHS adjustments) to potentially deal with how much other missing explanatories such as how well we incorporate new technology, demographics, etc, might be at play.
A year-labeled scattergram is always nice, too, to help suggest missing variables, while an actual-v-fitted timeseries chart helps us see how much the data might be driven by a few huge events such as the depression, WWII, iBubble, etc.
Hey Walt, I’m sure if we throw enough arcane statistical techniques at the data we can confuse the issue enough to completely obfuscate any understanding of the relationships of the variables. Isn’t that the purpose of economics data mining? All that statistical jargon certainly makes it sound scientific.
Correlation is not causation. Very often things have common causes. And as a scientist, I would never give even a second look to a correlation that had an R^2 of 0.17. An R^2 of 0.4 might mean there is something interesting that is worth a second look to see what is really going on, but that is it. A good fit will be at minimum around R^2 of 0.8 or higher. And the author doesn’t show the actual data graphs on this page, so I wonder what he is hiding. Maybe his correlation works in one era but fails in another. But I really don’t have the inclination to look up the data and replot it for myself.
When looking at things like economic growth you will nearly always show a low R^2, because you are trying to measure something with quite literally a billion moving parts. That being said, that is why this model is not so brilliant. You can’t simply pick and choose which independent variables to use and you certainly can’t choose a handful and blindly call it good. Once he includes actual inputs to GDP I have a feeling his numbers will radically change. If they don’t it would be interesting.
Also, do to the nature of GDP growth, you will need to correct for serial correlation. You don’t have any tests shown so I assume these tests were not run. The reason for this is that GDP growth is highly correlated with itself. This shouldn’t affect the data too much but if you correct for it and your numbers change you have some serious problems with your model.
Finally, Andrew’s comment, correlation is not causation. I haven’t been alive for an extrordinary amount of time, but it seems to me that when times are good governments tax and when times are gad governments cut taxes. Your regression is simply showcasing this and you have misinterpreted it as higher taxes mean higher growth.
And shark attacks increase as ice cream sales increase. So ice cream causes shark attacks? Nice correlation but there are other factors.
calhoun
maybe i read too much. mike’s headline is an “attention grabber”, i rhetorical devise. even if he ends up being serious about calling for such a tax rate, it is only a talking point, and the rest of the comments give you plenty of room to object to it, without claiming to reject the entire analysis, discussion, because you insist upon an absolutist reading of the headline.
with respect to caesar… i would be the last to claim i “understand” it either. but i am reasonably sure of my interpretation, and it is one of the reasons i think that old time carpenter was the first and greatest economist. maybe the last honest one.
jack
actually the rich have started stealing from the poor… their retirement savings.
schmendric
i suggest that removing data from an analysis is dishonest. if it was ww2 that created the effect, its still an effect. and we might learn a lesson from it. government activity to do education or medical care better might be just as stimulative as government activity to blow things up.
Andrew
as a scientist you must miss a lot of important insights by not giving second looks to things.
as i think it was Asimov who said… the most important word in science is not “aha!” but “that’s interesting…”
personally
i think it’s funny as hell the way people rush around desperately throwing words at an idea they don’t like.
i happen to like Kimel’s conclusion and with enough money behind me to sell it to the people i could use it to change America for the better. and my “science” would be no worse than the science of those currently running around cutting taxes to grow the economy…
“…because you are trying to measure something [economic growth] with quite literally a billion moving parts.”
Ahe! I see said the blind man. So economic growth is such an enormous and amorphous phenomenon that any attempt to determine individual affecting variables may be doomed to gross error. Yet economists are continually arguing about the “effect” of tax rates on economic growth. As though that,econoomic growth, were the reason for determining the specifics of a taxation policy.
And here I thought that governments collect taxes based upon their need to cover the cost of operating government. On Walker’s thread, preceding this thread, Sandi makes a point concerning Chinese currency manipulation and its effect on the growth of the Chinese economy (at the expense of China’s trading partners). Reasonable enough as there seems little reason to manipulate currency otherwise.
Taxation is for the purpose of paying government costs. Taxation is not for the purpose of fine tuning a process with “a billion moving parts.” While economists in this country argue about trade and taxation as significant variables in the growth, or should I say stagnation, of its economy I would suggest taking a closer look at income distribution. The masses can’t spend what the wealthy have redistributed to themselves. More jobs? A great idea that may come to pass when the masses of the workers in this country have income that they can feel comfortable about spending. I’ll take a shot and suggest that the one most effective variable in economic growth is spending. We tried spending what we didn’t have during the so-called housing bubble of the past decade. Maybe better pay for the jobs now available would result in more jobs for more people with better pay. Then deal with the Chinese manipulating their currency. And it might be of value to correct for the fact that our wealthiest citizens want to reap too great a share of the income pie while not wanting to pay their fair share of the costs of running the country that benefits them so well.
One issue arises with the number of businesses in S-corp and LLC format. This was not an issue much of an issue prior to the 90s at least.
With higher marginal rates many thousands of those business will either be converted to C-corps or dissolved and reconstituted.
Good for lawyers, good for CPAs, likely bad for economy.
I never said anything about the use of taxes…I was explaining the fact (and in defence of the author I might add) anyone measuring GDP growth will find that their R^2 will be quite low. For other scientists and statisticians, (like Andrew I assume from his post) who are used to not even considering an R^2 above .80 this is quite strange. It is low because data does not exist for the billions of things that make up GDP.
Anyhow, I was encouraging the author to strengthen his argument by taking into consideration serial correlation (as this violates an assumption of OLS) and encouraging him to widen his model so taxes are not considered in isolation (which are things he should be doing anyhow while playing with the data.) To make the jump and say higher taxes are the cause of GDP growth, and that 65% is peak efficiency, is simply unfounded when your model assumes taxes are the only inputs to GDP. As it stands, his findings simply show that governments tax when times are good and cut taxes when times are bad.
“Good for lawyers, good for CPAs, likely bad for economy.”
Good for lawyers and CPAs only if the tax system is complicated by every effort ot “promote” some kind of growth rather than simply collect funds as required to pay for government activities. Efforts to promote any kind of economic activity via the tax system is generally otherwise described as a “loop hole.” keep the tax scams out of the system and the tax attorneys and accountants will have to find honest work.
Anything that results in a more equitable tax structure, ie those with the biggest benefit pay the highest taxes, by definition will only benefit the economy by benefiting its individual participants. Remember, keep it simple stupid.
The point is that jacking up the top rate by any substantial amount will require rational business owners to respond in whatever way they can. entity choice does not per se have a great deal to do with simplicity or complexity.
Wish we would get off this tax rate/economic growth argument. It really is getting tiresome and unproductive. An economy can grow or contract at virtually any tax rate.
The better discussion to have, and this is particularly germane to the comment above;
“No it didn’t…it recovered from a recession in the early 2000’s, and continued to grow up to 2008!”
Is what fueled the growth. It wasnt tax rates, it wasnt deregulation…… it was private debt levels. Using private debt as a vehicle for growth ALWAYS has its limits. It will always reach an endpoint and then crash badly. The fact that debt was rising as median incomes were stagnant or falling (as a percentage of output) was the ultimate trigger of the collapse.
We need to address the private debt…… and that comes with more govt debt since govt debt is actually non govt income.
Everything is natural! There is no such thing as supernatural or other worldly…. simply poorly understood.
This is the type of use of statistics – horrible – that gives the use of statistics a bad name…or maybe I should use the term laughable to one who knows what they’re doing.Now where did you go wrong?…
So you started in 1929 when the top marginal tax rate was low and at 25%. Of course coincidentally that is right when the Great Depression began – a depression that had nothing to do with and was not caused by a 25% top marginal rate. So at the very start, the observed effects of low marginal rates are severly skewed by GDP growth rates of -12.0% and -16.1%…GDP growth rates that had nothing to do with the marginal tax rates. To put that into perspective, those 2 years alone have the same statistical effect on your model as -0.56% weighted 50 times.
Then you continue on and ignore what is known about recoveries – that the deeper the recession the steeper the recovery. The recovery was going to happen one way or another depsite what the top marginal rate was. Lucky for the premise that you were trying to find numbers to match, shortly after raisng the top marginal rate the economy – as would be expected by economic cycle – started to sharply expand giving high top marginal rate a undeserved benefit of 17.0%, 11.1%, 14.1%, and 9.7% GDP growth rates. The economy during that period expanded in spite of the tax rates, not because of them.
Then you continue on and ignore that the massive GDP growth rates in the early ’40s was caused by our massive spending on World War II. This again had nothing to do with the high top marginal rate, yet the high rates get the statistical benefit of the 10.0%, 25.0%, 27.7%, 22.7%, and 10.7% caused by WW II. Again putting it into perspective, the 3 middle years of WW II derived GDP growth equates to 1.6% weighted 50 times. For even better perspective, the middle 3 years of WW II derived GDP growth – which had nothing to do with high marginal rates – gives high marginal rates a 2.2% advantage over 50 years above the 2 early depression years – which had nothing to do with low marginal rates.
I’m not even going to get into you ignoring that post WW II the US had a virtual monopoly on global manufacturing bacause of the devestation of the world’s manufacturing sector during the war and the two decades of GDP benefit derived from that. I’m also not going to get into the fact that the top marginal rates are now applied to much lower incomes than ever before. For instance the top marginal rate in 1936 applied to those making $78.24 MILLION in 2010 dollars while the top marginal rate in 2010 applied to incomes a low as $250 THOUSAND. This is such a terrible application of statistics, I could pick it to pieces all day.
Now, are you man enough not to go searching for numbers to match your premise? Do you want some REAL numbers? Try applying the same model, only use a start point 10 years after the Great Depression and WW II. That way the numbers aren’t skewed by factors that had nothing to do with how high or low the top marginal rate was, like the depression and the effects of the war and rebuilding efforts…or at least the skewing will be limited and protected from those economy-altering events. Start with 1953 or 1954, then get back with the real life numbers, not the misrepresentative and misleading ones that these are.
BTW…sorry so late to the party.