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Don't you just love science? Especially when it slaps down Republican bull crap masquerading as "governing philosophy"? In some ways whats really astonishing is that a world view which starts out with such wrong-headed beliefs—notions rooted in fear and selfishness instead of in courage and cooperation—could capture enough of the American people to be any sort of political force at all. But it seems that many people are fearful and selfish, so they feel comfortable with the GOP "philosophy."

We, the courageous and cooperative, however, have science on our side,  and it just keeps calling BS on the ridiculous chimeras of so-called Conservatism. Science has shown that conservatives are wrong about global warming, wrong about liberal "bias" in the media, wrong about immigration, wrong about polling, wrong—well the list is too long to even hit the highlights.

Recently, yet another economist has verified something that is obvious to anyone who lives outside the Republican bubble: that low tax rates do not correlate with economic growth. That is, the Grover-Norquist-backed GOP article of faith "Thou shalt not raise taxes" is—of course—wrong.

Let's hop the orange curls for a little chat about the science on this one point of what one might laughably call Republican "economics."

In late October, Ethan Kaplan, an economist at the University of Maryland at College Park, published a blog post that examined the most straightforward kind of correlation between high tax rates and economic growth. Now we all know that "conservatives" swear by their belief that high tax rates kill growth and low tax rates explode growth, despite the most recent experience of the Bush tax cuts on the wealthy, which resulted in negative growth even before the Great Recession at the end of the Cheney-Bush years. Would it surprise you to know that Kaplan found the opposite to be true? I didn't think so. He writes:

Unfortunately, it is quite difficult to figure out the impact of taxation on growth. Changes to the tax codes usually pass Congress when other things are happening to the economy. For example, the 1982 tax cuts, which dropped the top marginal tax rate from 69% to 50%, were passed towards the end of a large recession. Moreover, the impact of taxes on growth can change over time as the economy changes.

Nevertheless, looking at the raw correlation between top marginal tax rates and growth can be helpful for getting a rough sense of the likely impacts of higher taxation on growth. One recent paper by Pikkety, Saez, and Stantcheva looks at the correlation between top marginal tax rates and growth and finds the growth is higher when top marginal tax rates are higher. I restrict myself to the historical experience of the United States and go back to 1930. In particular, I took real chained per capita GDP growth from 1930 to the present from the Bureau of Economic Analysis' (BEA) website. The correlation over this period between the top marginal tax rate and output growth is strong and positive . . .

A rise in the top marginal tax rate from 0 to 100 percent is correlated with a rise in per capita growth of 5.85 percentage points per year. One reason that this simple correlation might overstate the impact of the marginal tax rate on growth is that the top growth years were in the early 40s when the government was spending heavily and when the country was finally recovering from the Great Depression. If we look only at the post war period (after 1946), a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase of only 2.69 percentage points of growth. Moreover, the statistical significance of the relationship becomes marginal, as the p-value rises from 0.017 to 0.122. On the other hand, if we look at the time period encompassing 1960 to the present, a rise in the top rate from 0 to 100 percent is correlated with a rise in per capita growth of 3.03 percentage points of growth per year, and the relationship becomes more statistically significant (with a p-value of 0.064 percent). Finally, if we look only at the years since 1980, a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase in growth of 3.87 percentage points. In this case, the relationship is statistically insignificant (with a p-value of 0.392 percent), in part because the sample size is small.

While we cannot say that there is a robust significant positive relationship between tax rates and growth, it is still interesting that regardless of when we start the sample, higher top marginal tax rates are associated with higher not lower growth. Moreover, a narrative reading of postwar US economic history leads to the same conclusion. The period of highest growth in the United States was in the post-war era when top marginal tax rates were 94% (under President Truman) and 91% (through 1963). As top marginal rates dropped, so did growth. Moreover, except for 1984, a recovery year, the highest per capita growth rates since 1980 were all in the late 1990s, after the top marginal tax rate had been increased from 28% under President Reagan to 31% under the first President Bush and then 39.6% under President Clinton.

In other words, GOP wrong again.

And for good measure, they are also wrong about capital gains tax rates being the magical spur of economic growth, as Len Burman of Syracuse University shows here:

Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.

Low capital gains tax rates do accomplish one thing: they create lots of work for lawyers, accountants, and financial geniuses because there is a huge reward to making ordinary income (taxed at rates up to 35%) look like capital gains (top rate of 15%).  The tax shelters that these geniuses invent are economically inefficient, and the geniuses themselves might do productive work were the tax shelter racket not so profitable.  And the revenue lost to the capital gains tax loophole adds to the deficit, which also hurts the economy.

Thus, it’s no surprise that there’s no obvious relationship between capital gains tax rates and economic growth. Indeed, the low rates on gains might do more harm than good.

And even the Congressional Research Service, prompted by Republicans to study the question of tax rates and growth, returned a negative result:
Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.
And so what do the Republican majority in the House do when they get this report that puts the lie to their article of faith? Why, deep-six it, of course, as the New York Times reported on November 1:
The Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economic theory, after Senate Republicans raised concerns about the paper’s findings and wording.

The decision, made in late September against the advice of the agency’s economic team leadership, drew almost no notice at the time. Senator Charles E. Schumer, Democrat of New York, cited the study a week and a half after it was withdrawn in a speech on tax policy at the National Press Club

So, all in all, with science on our side, with demographics on our side, and with the Republicans itself on our side as the fall all over themselves to try to find new lies to tell the American people about their fearful and selfish "philosophy," I like our chances for progress in the years ahead. I'm just sorry we've had to live through the past thirty years of miserable "conservative" "policy" to get here.
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Comment Preferences

  •  My take on the correlation: (4+ / 0-)
    Recommended by:
    smokey545, Roger Fox, PeteZerria, George3

    People who make a lot of money know how to do at least one thing pretty well: make money.

    If the government or any other "cost center" takes somewhat more from one of these folks, they are well equipped to make somewhat more to compensate for the loss, and if I had the skills, that's exactly what I would do. Make one more deal, hire another person, expand the business, whatever.

    Thus making more for me and more for the economy.

    Oh, and probably also shed a few crocodile tears about how unfair life, and the government, was.

    I have an acquaintance who appears to have this valuable characteristic. I have not decided whether or not to risk asking him about my theory though.

    Moderation in most things.

    by billmosby on Sun Nov 18, 2012 at 07:30:39 AM PST

    •  I don't think it's a matter of "making money." (1+ / 0-)
      Recommended by:
      Roger Fox

      In this country, our agents of government make the money and supervise the distribution to the banks, which are then supposed to distribute it further, as needed.
      Some people know how to accumulate lots of money (the easiest way is to steal it) and, in addition, some people are impelled to hoard money, much as, for some reason, rats store up corn cobs that they never eat.
      My reference to rats is intentional, since I would argue that accumulation and hoarding are instinctive behaviors which, for some reason, get out of control (become obsessive) in humans.
      It may be that the beneficial effect of higher tax rates is a consequence of depressing the hoarding instinct.  If so, then it obviously only works before the hoarding starts, including the indirect hoarding that's involved in creating novel savings instruments and speculative "products" to be passed around among one's cronies.
      It is a fact that, although the quantity of money in circulation has increased at a steady rate, the rate at which it is exchanged -- i.e. the velocity -- keeps falling.  Instead of passing from hand to hand in a sprint, it has slowed to a trickle or a crawl. The dollar has turned from an eagle to a snail.
      Our system of taxation only collects from dollars that are moving. People sitting on a stash are not affected. Neither are people who pass money around in investment accounts and various hedge funds.  Which is why it is estimated that a transaction tax collected whenever dollars move into or out of an account could be as small as one half of one percent to collect enough to fund ALL extant governmental entities.
      The impediment we have to overcome is the belief that money is worth something. Of course, even totally worthless stuff gets hoarded by some people, but imagined value seems to be determinative for most.

      We organize governments to provide benefits and prevent abuse.

      by hannah on Sun Nov 18, 2012 at 08:23:12 AM PST

      [ Parent ]

      •  I'm sure what you say is true, (1+ / 0-)
        Recommended by:
        Roger Fox

        but I was trying to explain to myself why there might be a positive correlation between tax rates and economic growth.

        Do you have any thoughts on that?

        And by the way, my friend the landscaper finds the easiest way to make money is to schmooze with potential clients, hire people to get the work done, and pay the people who work for him about $14 an hour and up. I'm not sure if he has considered stealing, he's having too much fun trying to spend what he earns the "hard way". lol.

        Moderation in most things.

        by billmosby on Sun Nov 18, 2012 at 08:56:03 AM PST

        [ Parent ]

        •  New Deal tax policy (2+ / 0-)
          Recommended by:
          billmosby, PeteZerria

          allowed working and middle class families to keep what they earned.

          Post Regan tax policy has taxed these families out of the economy. They have lost the majority of what they earned over 3 generations.

          However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009.

          Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

          Increased income disparity reduces demand, and economic growth.

          FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

          by Roger Fox on Sun Nov 18, 2012 at 10:12:16 AM PST

          [ Parent ]

      •  I would offer (1+ / 0-)
        Recommended by:

        beneficial effect of higher tax rates is too drive smarter ideas in the business world. Ideas that sound good because of the tax impact are just not as important, thusly the CFO has less power and the visionary CEO does.

        Otherwise we see financial moves to dodge taxes, see Bain Capital, and huge capital flow to overseas and into market speculation.

        The 1986 Tax Reform Act did a major disservice to domestic investment.

        FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

        by Roger Fox on Sun Nov 18, 2012 at 10:17:36 AM PST

        [ Parent ]

  •  good research. (1+ / 0-)
    Recommended by:

    "We must be the change we wish to see in the world" - Gandhi
    "The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little" – FDR

    by smokey545 on Sun Nov 18, 2012 at 07:52:12 AM PST

  •  Thus The Weakness In The GOP Campaign (2+ / 0-)
    Recommended by:
    billmosby, Roger Fox

    There is no economic model to show that their approach would have worked in January 2009 or would work now. Oh yeah, but we should have trusted Romney because he made millions for Bain and he knows the books. Good news is that we apparently have a national consensus that sees through this supply-side bullshit.

  •  ThePlainThinker (1+ / 0-)
    Recommended by:

      Thank You So Much for taking so much of your time to prove this out for us average Americans. We can feel and taste that this is true but for most of us we cannot demonstrate and document it like you!!

  •  Not legit to compare GDP growth (0+ / 0-)

    between eras. Without qualifying factors. Pre 1970 GDP growth was not dealing with Resource and oil depletion.

    The change in the rate of population growth was a huge positive factor in GDP growth prior to 1970. Workforce growth is now at a historical low of about .95%.

    1933 to 1950, 8-12% GDP growth was not unheard of. In the last decade or so, we've averaged 2.2% or so.

    Of the 4 majors only productivity remains a positive driver of GDP as it has for a century.

    Better factors over time are peak to trough economic cycles, total job shedding/job creation, length of economic downturns.

    The Conventional wisdom says the best we should hope for is 3 to 3.5% GDP growth, and we're averaging something like 2.2%. Add in an output gap of 2-3 trillion, and its clear the US economy is underperforming markedly.

    Add in 20-28 million people without full time year round work and its clear the US economy is underperforming.

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Sun Nov 18, 2012 at 09:46:40 AM PST

    •  Check out the references . . . (1+ / 0-)
      Recommended by:
      Roger Fox

      All the authors take into account differing circumstances at different times. Even so, the results remain the same.

      •  They do remain the same: end result (0+ / 0-)

        And instability has increased, as well as Income disparity, which lowers demand.

        FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

        by Roger Fox on Sun Nov 18, 2012 at 10:01:01 AM PST

        [ Parent ]

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