The Effect of Marginal Tax Rates on GDP Growth

[dkf]

http://buyandholdplus.com/images/taxesandgdp.bmp

http://buyandholdplus.com/blog/2010/09/the-effect-of-marginal-tax-rates-on-gdp-growth.html

If you use history as your guide, then we should set the top marginal rate at 88 percent.  Why 88 percent?  Because during the time that this was the top marginal rate, the GDP expanded at a rate that even countries like China and Brazil would envy -- 17.5 percent.  And we need to make sure that we set it at 88 percent, not 86.45 percent.  Setting the tax rate at that level historically provided us with GDP contraction of 5.9 percent.

Proponents of tax cuts often talk about how the economy jumped after Reagan cut taxes from 70 percent to 50 percent.  Well, that makes a great story, but it's just not true.  When tax rates were 70 percent, GDP growth averaged 4.2 percent.  After Reagan cut the top marginal rate to 50 percent, GDP growth was 3.5 percent.

The bottom line, if you use history as your guide, is that there is no correlation between the top marginal tax rate and economic growth.  We have a situation here where 80 years of history counters the arguments of ideologues.  Of course, ideologues won't let the facts dissuade them.  But rational people should.

[mmonk]

1. Bingo.

That's similar to the data I keep coming up with that I expressed in your other thread. Actually, overall demand determines lots of things including employment rates.

[dkf]

2. Actually I would argue the top marginal tax rate says little about effective tax rates.

Which is the point I am always trying to make.

That differs from tax revenue as a percent of GDP which is the overall effective tax rate.

[mmonk]

3. While that is true, even when the top marginal rate was 91%,

the effective rate was over 80%. If you even remotely compare it to today's effective rates, the argument that the tax rates determine prosperity and growth rates is misplaced.

[dkf]

4. Do you have data to back that up?

I know for a fact that there have always been fancy tax gimmicks and loopholes galore.

[mmonk]

5. It used to be that gimmicks were actually a way to direct money

into certain areas of the economy whether it be interest or charity for examples. The data is quite easy to look up. You can find historical effective and marginal rates published many places which have it all charted out. Try googling it. The return on tax cut stimulus is not all that great, something in the area of for every $1 in income tax cuts, the return is only $1.01 for that $1.

[mmonk]

6. Here is a site that gives marginal and effective rates

and also links to tax exemptions for income tax rates.

http://www.truthandpolitics.org/top-rates.php

Notice the similarity in the dips in the graph at the bottome of the page with the rates before and during the great depression and now.

Here are recent average effective rates

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456

[mmonk]

7. The effective rate I quoted you was the highest effective or statutory

rate, not the average which was lower (but what I can't find what that was yet). Here is something on the Bush tax tax cuts and marginal rates. The richest are contributing less which if that creates growing economies, why has ours been contracting?

http://www.cbpp.org/cms/index.cfm?fa=view&id=139

Why there are many factors, the bottom line is we aren't collecting enough taxes which is producing the deficits but the theory that revenues increase when rates decline is not bearing out.