An exploration of the historical relationship of the top bracket tax rate and the trends in the Gross Domestic Product. Incontrovertible evidence of stuff that you already know to be true.
Result: The percentage rise in top bracket tax rate is a three-year leading indicator of the percentage rise in the GDP with a correlation of r=+0.77.
Methods: The top tax rate for the years 1985-1994, a period during which the top rate was modified frequently was used along with GDP for the years 1988-1997 (for almost two decades before 1985, the top tax rate was steady at 50% so it doesn't provide enough information, and from 1994 to 2000, it was steady at 39.6%, also not so interesting). Both variables were graphed (as percentages) against time, and overlayed (the first graph being the % change in tax rate from the previous year and the second graph being the % change in GPD from the previous year). They seemed to run in a similary curve, so when the GDP graph was shifted three years back in time (the reason for the two time periods), it made evident the significant result.
Analysis: As the rate of tax paid by the very rich is increased, the GDP gains as a result. The top tax rate is a three-year leading indicator of the productivity of the economy, with a correlationship of r=+0.77. At r=+1.0, it would be a perfect predictor, as in, when I shut my eyes it gets dark. r squared is the predictability, so 59% of the time, you can say that there is a perfect relationship between the two measures. This means that as tax rate goes UP, GDP goes UP three years later. If trickle down economics were a valid theory, the empirical data would show a negative correlation (tax goes DOWN, GDP goes UP) and you could expect something like r=-0.77.
The graphs are available here. The first two pages are two similar type graphs of variables that everyone agrees are correlated with one acting as a leading indicator: the inflation rate and the fed short term lending rate. We are watching this in action right now as Alan Greenspan weighs his decision to raise rates in the face of looming inflation. It seems that they are shifted by one year for the greatest correlation (r=+0.73 from 1950 to 2000 pg.1). During the main focus period, they are only at r=+0.33 pg2. It should be noted that there are many other factors involved in the decision to raise short term rates, just as there are many factors involved in the productivity of the economy as a whole. However, as the graphs on pages 3 and 4 show, where trickle down theory claims that the single factor of tax rate cuts on the wealthy actually can stimulate growth, it is quite apparent that the opposite is indeed the case.
The number are available (in .xls) here. See columns O and I for variables used for graph on page 4 (the one with r=+0.77)
There are a lot of scribbles and unrelated items. I apologize.
The sources for the numbers are hotlinked in the column headings for each.
Discussion: There are two main explanations for this result as I see it. The first is that as the tax rate is raised on the investor class, it usually comes along with loopholes that allow for tax breaks on invested assets. So the rich are obligated to put more money into long term capital investments and this stimulates growth. Otherwise they would have to write a check for the full amount, which has historically ranged as high as 91%-94% from the end of WWII up till 1959 (when we actually believed in spending the money required to fight endless wars of ideology). The second reason is that no matter how many loopholes there are in a rate that is 50%-90%, the goverment is going to take in more revenue than it will when it is at 35% (where it sits today, and falling fast). The safety net that this provides for people that find themselves out of work or struggling to get a loan for their small business can only have a positive influence on growth.
For those of you who read this whole thing, I thank you for your patience and interest, and would appreciate any comments that you might have.