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High taxes = high economic growth

DATA

The top marginal tax rate is the marginal income tax rate paid by the richest Americans. A "marginal" tax rate is the rate you pay on that margin of your income that falls above the income bracket; for example, if the top bracket starts at $374,000 and the marginal rate is 35% (as it is now), you pay 35% of that portion of your income greater than $374,000 – not on your whole income. Data from the Tax Foundation is here, by year.

GDP growth is from the Bureau of Economic Analysis. GDP was determined per-capita and adjusted for inflation, yielding real per-capita GDP. These values were compared to the previous year's data to determine annual growth rate.

Job growth was taken from data supplied by the Bureau of Labor Statistics. Since there are many conflicting measures of unemployment, I went with a straight nonfarm payroll as a percentage of the total US population. Obviously there are problems with this (the large move of women to the workforce during 1970-1990 for example), but all employment indicies have problems of one sort or another, and I thought this was the least susceptible to manipulation.

Data for the latter begins in 1948, which means that the first year job growth can be computed is 1949. All data were therefore restricted to the sixty-one years 1949-2009.

METHODOLOGY

There have been twelve top marginal tax rates in the 61 years covered:
92% (1952-53)
91% (1949-51, 1954-63)
77% (1964)
70% (1965-81)
50% (1992-86)
39.6% (1993-2000)
39.1% (2001)
38.6% (2002)
38.5% (1987)
35% (2003-09)
31% (1991-92)
28% (1988-90)

Per-capita job growth and real GDP growth were computed for each year, and the average for each of the twelve marginal tax rates were computed, and are displayed on this graph. Colored lines are standard linear regressions.

CONCLUSIONS

The next time a Republican tells you that low taxes are good for the economy, ask him to prove it.

In fact, high top marginal income tax rates are linked with improved economic growth.

Tax rates overall have no significant effect on job growth – but the non-significant effect implies that high taxes improve job growth too.

Originally posted to The Numerate Historian on Sat Aug 07, 2010 at 11:54 AM PDT.

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Comment Preferences

  •  Tip Jar (7+ / 0-)

    If you don't stand for something, you'll stand for anything.

    by Keith Pickering on Sat Aug 07, 2010 at 11:54:46 AM PDT

  •  This analysis is faulty (9+ / 0-)

    because a top marginal rate does not reflect how much of their income those subject to that rate pay in taxes.  It is only half of the equation.  The other half of the equation is how much of their income in that top marginal rate bracket is actually subject to taxes.  In other words, how much income can be deducted, exempted, or shelter.  And that was changed DRAMATICALLY in the Tax Reform Act of 1986, which significantly curtailed deductions, exemptions, and shelters.  So, a comparison of a top marginal rate prior to 1986 bears little resemblance to the top marginal rate post 1986.  If, in 1960, I paid a top marginal rate of 90% on a $1 million a year income, but was able to exempt, deduct, or shelter $800,000 of that, I am far, far far, better off than if, post 1986, I have a top marginal rate of 35% but can only deduct, exempt, or shelter $200,000.  

    By far, the better data is the effective tax rate -- how much of your income is actually paid in taxes.

    The CBO has been keeping statistics on effective tax rates since 1979 (before the Reagan tax cuts).  Those can be found in a summary fashion  here.    The first chart is effective tax rates considering all federal taxes, including corporate taxes, excise taxes, etc.  If you want to talk about federal income taxes, look at chart two.  Because of precisely the kind of thing I'm talking about, the rich (the top 1%) paid MORE under Clinton's top marginal rate of 39.6% than they did in 1979, when the top marginal rate was 70%. Yes, the rich paid MORE in federal income taxes when the top marginal rate was 39.6% than they did when the top marginal rate was 70% -- largely because the Tax Reform Act of 1986 largely reduced deductions, exemptions, and shelters. That is proof positive that the top marginal rate data alone is not an accurate view of what people are paying in taxes.  

    I have no problem with a discussion of the effect of tax policy on GDP.  But at lease use meaningful data.  

    Even better, if you want to examine the effect of tax policy on GDP, you should use the percent of GDP that is paid in individual income taxes, or corporate income taxes.

    Either of those measures is far more meaningful than top marginal income tax rates.  

    •  This is a good point (4+ / 0-)

      but even with better data, you have too many variables to tease out the effects of higher tax rates.

    •  That is why the entire federal tax system needs (3+ / 0-)
      Recommended by:
      Garrett, drewfromct, neroden

      to me reformed.

      We need a truly progressive tax system.

      The costs of payroll withholding taxes alone should be shifted to all businesses gross receipts which would require a much lower rate (between 3-5%) to realize the same amount of government revenues. Wage earners have been taxed on their gross earnings for decades and they cannot pass the costs of their taxes along to their customers like businesses always defer their costs. Shifting the costs to the businesses gross earnings spreads the cost over a much larger base and reduces the costs to each individual. This would actually increase government revenues while reducing the tax rates. Divorcing taxation from payroll entirely would greatly relieve downward pressure holding down pay rates and discouraging adding additional employees.

      We need to simplify the federal income and really make it truly progressive. I would suggest raising the minimum taxable income from the current $400 to $75,000. Begin the progressive income tax at $75,001 without any deductions, credits and loopholes on all income no matter the source. This includes the Wall Street gamblers and the high 'n mighty corporations. All incomes should be equal no matter where it comes from and should pay the same progressive tax rates as any other.

      To be clear though, everyone shouldn't have been paying income taxes in the first place. In fact, wages/salaries were not considered taxable income until the reporting rules were changed in 1945 with the victory tax which was to be temporary until the debt from WWII was retired. The income tax was always intended to be assessed only on those that already received economic benefit from government. It's the business community that benefit from government action.  The businesses benefit from the government taking responsiblity for their workers health and retirement costs through Medicare and Social Security. Government provides a literate workforce through public education. Goverment provides the infrastucture that provides reliable transportion to move products and protection under the laws. They should not avoid their taxes they should embrace them for all they provide to them.

      Besides the costs of all taxes are worked into the price of the product or service the business sells. These costs are passed from vendor and supplier to retailer and then finally to those that sell their labor for they cannot pass their costs on to anyone else. The wage earner is the lowest point of the tax food chain, they always end up being the ultimate taxpayer.

      Both of these reforms together would allow around 25% more payroll dollars to stay circulating in local economies even longer than they linger today. This would drive up demand for more products and services which would create more jobs and generate even more tax revenues and reduce demand for government services than the current tax system.

      Really don't mind if you sit this one out. My words but a whisper -- your deafness a SHOUT. I may make you feel but I can't make you think..Jethro Tull

      by RMForbes on Sat Aug 07, 2010 at 12:27:22 PM PDT

      [ Parent ]

    •  No, the analysis is not faulty.... (2+ / 0-)
      Recommended by:
      Gooserock, virginislandsguy

      you're imputing hypothetical rationales for the correlations!  And there are other such rationales possible!

      The fact is that the top marginal rate, not the effective rate, may affect propensity for reinvestment in productive activities by large corporations, as opposed to handing the money out as CEO bonuses.  There is substantial empirical evidence that this is actually the case.

      So there.

      -5.63, -8.10. Learn about Duverger's Law.

      by neroden on Sat Aug 07, 2010 at 12:52:56 PM PDT

      [ Parent ]

      •  Please explain how the top marginal (1+ / 0-)
        Recommended by:
        Justanothernyer

        rate for individual federal income tax purposes can have any significant effect on "propensity for reinvestment in productive activities by large corporations" as well as the data supporting the notion that changes in top marginal rates for federal individual income tax purposes -- irrespective of the deductions, exemptions, etc. -- significantly affect the behavior of large corporations and their decisions to reinvest.  I would suspect that corporate income tax policy has a far greater effect on corporate reinvestment decisions than does individual income tax policy.  

        At any rate, I am old enough to remember the days before 1986, when interest on credit cards was deductible, when virtually anything an individual wanted could be claimed as a deductible "business expense" on individual income tax returns, and when  passive activity losses had a great impact on investment decisions. It simply defies reality to argue that you can look at top marginal rates alone without also considering what income could be deducted, sheltered, or exempted from those top marginal rates.  

        You also, by the way, need to look at where those top marginal rates start.  The Eisenhower top marginal rates started on incomes that, in today's dollars, would be well over $2 million a year.  Today's top marginal rates start in the $400,000's.

        There is just so, so, so much wrong with putting up a chart of top marginal rates, superimposing a chart of GDP, and trying to draw some kind of correlative conclusion.  

        •  Well One Effect Is That Super High Incomes Are (2+ / 0-)
          Recommended by:
          virginislandsguy, drewfromct

          not offered in the first place, because the earners can't keep it.

          Otherwise pump the thing dry, you're set for life before the business is starved into decay.

          We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

          by Gooserock on Sat Aug 07, 2010 at 01:08:43 PM PDT

          [ Parent ]

          •  Those super high incomes are more (0+ / 0-)

            often capital gains, so they are not subject to federal income tax rates at all.

            What makes much more of a difference to a corporation is whether what is paid to the CEO is deductible from the corporation's earnings as an expense for purposes of the corporation income tax.

            I have never seen any study demonstrating that individual federal income tax rates had any significant effect on CEO pay, OTHER THAN to make more CEO's take their compensation in the form of capital gains rather than ordinary income.  

            •  What would happen if we (0+ / 0-)

              lowered or removed corporate income taxes and increased capital gains taxes?

              •  Significant increases in capital gains taxes (0+ / 0-)

                Yes, it would mean that hedge fund managers, who get the majority of their income in the form of capital gains, would pay significantly more in taxes.

                It would also drive some investment overseas.

                In addition, remember that most capital gains taxes are due when an investment is sold or some transfer of ownership takes place.  When the capital gains tax rate is increased, people hold on to investments, not wanting to sell or liquidate, in the hope that the rate will come down.  That is why some studies show that an increase in capital gains tax rates often does not result in increased revenue (remember, Obama was asked about that during the Presidential debates).  

                Like most changes in tax policy, there would be some positive and some negative effects.

      •  Exactly. My Layman's Question Is: Where do (1+ / 0-)
        Recommended by:
        camlbacker

        shelters direct those moneys, and what kind of economic activities do they drive?

        As long as they don't basically end up in the hands of the earner and family, they're doing their utterly crucial job of suppressing the incentives to run enterprises recklessly as casinos for big short term gains.

        Reinvest in businesses and employees, community charity, invest in commons or other kinds of activity society deems valuable and needing of support.

        --any of that is depriving the economy of incentive to gamble, and that's the most important function of the highest bracket and maybe two.

        We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

        by Gooserock on Sat Aug 07, 2010 at 01:05:52 PM PDT

        [ Parent ]

        •  If you want to see what the Tax Reform Act of ` (0+ / 0-)

          1986 did, look, for example, here.

          And there's no question -- as demonstrated by the CBO numbers -- that it makes a huge difference.  It is the primary reason why, as the link I gave above demonstrates, the rich paid more under a top marginal rate of 39.6% under Clinton than they did under a pre-1986 top marginal rate of 70%.  

      •  And, by the way, those big (0+ / 0-)

        CEO bonuses are, more often than not, being given in stock and stock options.  So, the capital gains tax rate is far, far, more relevant to big corporate CEO bonuses than is the federal individual income tax rate.  

        •  Corporate management should (0+ / 0-)

          obtain stock by buying it via a broker.

          Stock options should be illegal.

          Corporate management should only be able to buy their employer's stock within 10% of the 2-year high or be liable to pay a make-up tax to the federal government to prevent business sabotage.

          Active and former corporate management should only be permitted to sell 10% of their current/former employer stock holdings with any year within ten years of active duty.

  •  Just as observation, (2+ / 0-)
    Recommended by:
    neroden, bubbanomics

    on this chart, the correlation on job growth looks weaker than the correlation on GDP growth.  

  •  We should bear in mind (3+ / 0-)
    Recommended by:
    SingleVoter, neroden, palantir

    that back in 1949 communist China was really Communist China. In the Fifties there was little to no economic competition from Europe and Japan. India and Korea were no competition until around the 80s or so.

    Much of our present economic woes can be attributed to the "free" trade agreements which have placed us in an unwinnable Race To The Bottom in terms of wages and regulations. Therefore any talk of tax reform should include the return of tariffs on imports, specifically punitive tariffs on goods and services imported from nations which refuse to meet our own standards on the protection of labor, consumers, and the environment. Taxing the rich seems pointless as long as we keep exporting jobs to lands where workers are paid 25 cents an hour to work in toxic hellholes.

    Al Qeada is a faith-based initiative.

    by drewfromct on Sat Aug 07, 2010 at 12:51:01 PM PDT

  •  You point out a favorite sore point (2+ / 0-)
    Recommended by:
    drewfromct, camlbacker

    None of this data is complete unless you also analyze CORPORATE tax rates, and government revenue from tariffs, leases and licenses.  What the plutocrats want you to focus on is personal income taxes, but not total government revenue.

    Isn't there anyone out there who's the least bit interested in explaining why at the beginning of the 1960's corporate taxes represented about 30% of total gov't revenue, but now represent less than 8%?

    I can't stay to chat, but I'll check back this evening.

    "Never let up. Crush bigotry and greed."

    by LouisMartin on Sat Aug 07, 2010 at 12:59:22 PM PDT

  •  Of course low taxes are good for the economy! (0+ / 0-)

    The rich are loving it!

    When have you known the GOP to give a rats-ass about job creation (aside from when a Democrat is in office)?

  •  Some other historic numbers (1+ / 0-)
    Recommended by:
    drewfromct

    are when Kennedy took office unemployment was at 6.6%. By the time Nixon took office it was down to 3.4%. In fact, unemployment stayed BELOW 4% for 4 straight years beginning in 1966. Under alleged economic wiz Reagan unemployment never went BELOW 5.3%. Reagan inherited a 7.5% unemployment rate and it went UP to 10.8% TWO full years into Reaganomics and was still above 10% after 2 1/2 years.

    Democrats have been horrible at selling the reality of their much better economic results to the voting public.

    •  Do you want to cite those? (0+ / 0-)

      those on the right argue that the Kennedy Tax Cuts (so named even though they were passed in 1964 after Kennedy's death) which cut taxes on the rich had a great deal to do with that growth during the LBJ years.  That's a big part of the right's "evidence" that tax cuts spur growth.

      Me, I think it's far, far, far more complicated that just tax cuts or tax increases -- there are far too many variables in what causes economic growth than just the one or two things that those on the right -- or some on the left -- want to point to.  

      •  Oh, the right says it was tax cuts (1+ / 0-)
        Recommended by:
        drewfromct

        during the '60's that spurred growth?

        Yeah, that plus the introduction of Medicare, Medicaid, food stamps, the Civil Rights Act, Project Head Start, Public Broadcasting, the National Endowments for Arts and Humanities, the Urban Mass Transportation Act, and environmental laws too many to mention, just to name a few? Most of the time the right wing points to the LBJ years as the biggest expansion of government ever. Make sure you remind them of the great economic success during that time also.

        •  Exactly the point (0+ / 0-)

          there are so many variables in any given decade that it is almost impossible to tie growth in GDP to one factor, as the diarist attempts to do here by claiming there is some causative link between high top marginal rates and growth in GDP, as if that is the only factor.  

  •  The outcome of tax policy (1+ / 0-)
    Recommended by:
    drewfromct

    Here's another tool to put in your arsenal to dispel the GOP disinformation.  FACTS.

    Trickle Down Reality, It only works for Corporate Profits

    The 2001-2007 expansion outperformed the average post-World War II expansion in only one area:  

    Corporate profits, which grew much more rapidly than average.

    The majority of wager earners today are low wage putting a higher tax burden on the rest.  The middle is being squeezed while the high income has had a 10 year tax vacation resulting in this deficit.  It's not rocket science.  Return the tax rate, drop both the Reagan and Bush tax cuts:

    Annual Growth Rate Comparisons

    For six of the seven indicators, the average annual growth rate between 2001 and 2007 was below the average growth rate for the comparable periods of other post-World War II economic expansions.  

    Notably, this expansion was among the weakest since World War II with respect to both overall economic growth and growth in fixed non-residential investment.  These two indicators should have captured any positive “growth effects” of the tax cuts.

    The labor market also was weaker during the 2001-2007 expansion.  Both employment growth and wage and salary growth were weaker during this expansion as a whole than in any prior expansion since the end of World War II.

    The 2001-2007 expansion outperformed the average post-World War II expansion in only one area:  corporate profits, which grew much more rapidly than average.

    http://www.cbpp.org/...

    During this same period the top 1% of Americans enjoyed the same huge gains in income of 70% they did in the 1920s.  Is it any wonder our present Depression.....ahem...Recession looks just like it did in the 1930s?

    Top 1% Income Gains Highest Since 1920s

    Piketty and Saez’s unique data series on income inequality, based on IRS files, is particularly valuable because it provides detailed information on income gains at the top of the income scale and extends back to 1913.

    The new data show:

    2007 marked the fifth straight year in which income gains at the top outpaced those among the rest of the population. From 2002 to 2007, the average inflation-adjusted income of the top 1 percent of households rose 62 percent, compared to 4 percent for the bottom 90 percent of households (see Table 1).

    So, once again the FACTS dispel the LIES.  Trickle down was a ruse to enrich the top 1% of our population.

    This article  is one of the most complete and frankest articles on the debacle we are in I have found to date.

    Grand Theft America
    by Stephen Lendman
    http://baltimorechronicle.com/...

  •  I don't support punitive rates of taxation (0+ / 0-)

    Some people get angry at me for arguing this point, but I can't support tax rates in excess of 50%. Philosophically I don't think someone should fork over $.90 on every dollar after a certain point to the government. I have no problem with higher taxes for the affluent, but I also don't believe in wealth confiscation either.

    I don't get the argument that "lower taxes = more economic growth". Imagine I own a restaurant and it only attracts 70% of the projected clientele. So I pay less in taxes and have a little more. But the patrons aren't coming in more. My current wait staff is enough. How is having more money going to make people come in? Or how is it going to create more demand for my restaurant?

  •  Rates need not be fixed (0+ / 0-)

    We could match top income recipients with random previous taxpayers aged 40 to 64.

    If Mr. Rich gets matched with Mr. X in May 2012 and Mr. X is unemployed, all but $250,000 of Mr. Rich's 2011 income would be payable into the Treasury.

  •  Most top-level CEOs have their pay (1+ / 0-)
    Recommended by:
    AaronInSanDiego

    based on after tax rates by contract.

    Mr. Top-Level CEO will take home $30 million if the top tax rate is 35% or 90%.

  •  Not according to this conservie... (0+ / 0-)

    Quote:
    The Kemp-Roth tax cuts were passed in 1981. That year, the federal government took in 599.3 billion dollars in reciepts.  Now let's see what they took in for the rest of Reagan's term.

    1982  - 617.8 billion
    1983  - 600.6 billion
    1984  - 666.5 billion
    1985  - 734.1 billion
    1986  - 769.2 billion
    1987  - 854.4 billion
    1988  - 909.3 billion

    What do you know.  Despite the tax cuts, the revenue increased.  Unfortunately, at this time, the democrats controlled Congress and forced increases in domestic spending as the price of doing business exacerbating the deficit, but the theory holds - raise taxes: revenues go down, lower taxes: revenues go up.   :D ;)
    http://www.usgovernmentrevenue.com/...

    -- end quote --

    This post was in response to my post, "when did tax cuts ever increase revenue?" or something close.

  •  Now THESE are the kind of diaries (0+ / 0-)

    and comments I like to see on dKos. Honest debates due to the ambiguity of which economic datasets are most germane to tax policy. Kudos to the commenters for keeping it civil.

    That being said, I think that high marginal rates do influence personal financial decisions and drive the political narrative. It is also important but difficult to allow for the distortions of the growing credit bubble of the last 25 years with regards to GDP and tax collections.

    One night in Bangkok makes a hard man humble ... Murray Head

    by virginislandsguy on Sat Aug 07, 2010 at 08:56:47 PM PDT

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