Missed Lessons of the Great Depression
In a Seeking Alpha web article by John Early he goes into a mathematical analysis of the effects of top marginal tax rates on GDP growth.
The article which is worth a full read especially if you like charts and scatter plot graphs (who doesn't!) quickly comes to the unmistakeable point that the theory, or dare I say "closely held belief" that lower marginal tax rates increase growth, is as we might have suspected not exactly true.
In his opening statement he notes:
Federal Tax policy has a long history of influencing the economy and investments. Understanding the actual influence may be crucial to navigating the next few years. To paraphrase Upton Sinclair:
It is difficult to get [an economist] to understand [the influence of marginal tax rates] when his [consulting fee or salary] depends on not understanding it.
The common belief is that lower marginal income tax rates lead to stronger growth. This would be an inverse relationship where the growth rate and tax rate move in opposite directions. The empirical reality differs starkly.
Sure you don't have to have an Economics Degree from Vanderbilt to make fun of economist by paraphrasing Upton Sinclair, but he has one anyway.
Below the fold for more.
In the chart shown here (From Mr Early's article) a scatter plot showing data points of top marginal tax rates and GDP growth with a 2 year lead time between the marginal rate and the GDP effect which Mr Early states is the "lead time with the best correlation".
The Green shows the optimal growth around late 60% range and the red is the linear progression.
The Pink line in the graph above is the theoretical "trickle down" economic idea that GDP should go up as top marginal rates go down. In other words the Pink line is what Republicans believe.
From what is my favorite part of the article and the line that inspired me to share this with the KOS community.
In the chart above, the red line shows a positive relationship where growth and the tax rate move in the same direction. The green line shows a positive relationship through the marginal tax rate rising into the mid 60s percentile rage. Those who are uncomfortable with this positive relationship correctly point out that correlation does not prove causation. For example, it is true that rising ice cream sales do not cause warmer temperatures. On the other hand, if there were a theory that warmer temperatures caused ice cream sales to decline (an inverse correlation) while the empirical data showed a positive correlation, the theory would be proven false. And so it is with the theoretical pink line in the chart above.
emphasis added by me to show my favorite line.
So while there is room to argue that the theory higher marginal rates increase growth is not a proven fact, the belief that lower marginal rates increase growth is directly refuted. Not paying for tax cuts because they "pay for themselves" is crap to put it technically.
Economists and others, who promote this belief that lower marginal rates lead to faster growth, never specify when the influence is supposed to occur. To get specific would make it too obvious the theory is wrong.
Now the bad news...
The lagged effect of low marginal tax rates suggests the baseline growth rate is around 1% this year and 1.5% in 2015 and 2016. Growth closer to the long-term average of 3.3% should begin in 2017 when the lagged effect of increasing the capital gains tax rate should begin influencing growth.
So if he is correct, and our current economic situation plays out as expected, the growth rate should continue around the 1% to 1.5% rate running into the 2016 elections.
This will give the Republicans a lot to campaign with.
The suggestion: I would propose we start adding the effect of marginal tax rates on GDP to the debate now in preparation for making the argument in 2016 that sluggish growth is not due to failed Administration/Democrat policies but in fact the negative effect of allowing Republicans to have a say in tax policy.
We should also prepare as progressives to confront 3rd way democrats who will take continued sluggish growth as a wedge to insert business-centric policies into the Democratic platform.