Marginal Rates and Economic Growth: They Go Up Together

With Republicans frantically clinging to discredited ideology and digging in their heels on raising top marginal tax rates, I thought it would be worth revisiting a post from a couple of years ago, showing some excellent long-term evidence that higher marginal tax rates are not associated with slower growth. Quite the contrary, in fact. Here you go:

Mike Kimel once again does yeoman’s duty to compare the two:

Tax Rates v. Real GDP Growth Rates, a Scatter Plot | Angry Bear.

In this post commenter Kaleberg adds a very cool scatterplot.

Each dot is a year (t), compared to another year one to four years later (t+1, t+2, etc.).

Bottom axis is the top marginal tax rate in the starting year. Left axis is annual GDP growth over the ensuing one to four years.

Starting years from 1929 to 2008.

With everything trending up and to the right, it sure looks like higher marginal rates and faster growth go together. But it’s hard to eyeball these kinds of things, so I pulled correlations. For ending years t+1 through t+4:

0.27 0.28 0.28 0.27

I also dropped in Real GDP/Capita in place of Real GDP. Of course the growth rates are slightly lower — the population (the denominator) was growing. But the graph looks basically the same.

Here are the correlations with marginal tax rate — also lower, but darn close:

0.23 0.23 0.23 0.21

Very consistent.

Short story, there is a statistically significant positive  correlation between marginal tax rates in year X and both GDP and GDP-per-capita growth over ensuing years.

It’s pretty small, but consistent and consistently positive — a higher marginal tax rate in year X correlates with faster growth over the ensuing four years.

Especially interesting: this encompasses a huge range of marginal rates — from a low of 28% (’88 through ’90) to highs of 84-94% (1944 to 1963 — when we saw the fastest growth in U.S. history; ’64-’69, the top marginal rate was over 70%).

It’s worth noting that the lowest rate since 1928 was 24% — in 1929.

Cross-posted at Angry Bear.

  1. Peter John
    November 23rd, 2012 at 21:10 | #1

    The main assumption for lower taxes on the rich is that it will allow the rich to invest their money in ways that are much better for the economy than the government can. An assumption not backed by facts. Historically when people have much more money than they need what usually happens is a speculative bubble followed by a depression. The reason for this is 1) lots of money 2) lousy returns on safe investment 3) an investment idea that sounds reasonable 4) news that people are getting good safe returns in this investment 5) the bidding up of this investment way pass any sensible point. 6) the crash that happens when sense replaces greed and fear replaces sense.

    Excess wealth and income is fuel for the speculative bubble. We need to tax the rich for the sake of economical growth and for the sake of the country.

  2. Mitch
    November 24th, 2012 at 02:04 | #2

    The more important question is overall tax rates vs growth. I think higher overall tax rates lead to slower gdp growth. We will all be paying higher taxes soon based on the huge deficits the country is running up.

    The other issue is a tax on the rich like the AMT is now scheduled to hit about a third of the population this year if we go over the tax cliff.

  3. November 24th, 2012 at 14:10 | #3

    @Mitch: “I think higher overall tax rates lead to slower gdp growth.”

    Lots of people think that but it doesn’t seem to be the case, at least in prosperous countries taxing in the range that prosperous countries tax. (We’re at the very bottom edge of that range.)

    For me the most convincing long-term, large-sample demonstration of that is here:

    http://www.asymptosis.com/u-s-versus-europe-whos-winning-now.html

    But follow related posts at the bottom of that post for much more evidence.

    In prosperous countries over the last many decades, tax levels have had little or no correlation with growth rates. It’s a myth.

    “We will all be paying higher taxes soon based on the huge deficits the country is running up.”

    Not if growth rates are higher than interest rates.

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