Taxes and Economic Growth

GDP Growth vs. Tax Rate of Top Bracket

Discussion:

There are many important caveats that must be kept in mind when considering this graph. First, it does not suggest that taxing the high earners in and of itself boosts the economy. Whatever economic benefit comes from taxing anybody comes from what we do with the money. Taxing in and of itself removes money from the economy, but spending that is funded with those taxes adds money to the economy. What this data may suggest is that the things we have spent the money on have tended to be more beneficial than the things the high earners would have spent it on.

Secondly, the correlation is quite chaotic. You can see that there is a correlation- all of the 5 best years for GDP growth have been years when we've had high rates for the top bracket and the 2 years when we've had the lowest rates were both among the 4 worst years for GDP growth. There have been no great years for GDP growth with low taxes, but, there have been terrible years with high taxes. Nonetheless, on average, our GDP has grown about 4% faster when we've had the highest taxes than when we've had the lowest taxes, which is a dramatic margin.

Thirdly, the rate for the top bracket is a poor measure of how much the rich actually pay in taxes. What we really should look at is the effective tax rate of the top x% as a share of all their income. Sometimes the top bracket has started at very high incomes and other times at fairly ordinary incomes. Deductions and loopholes have shifted over time. Also, this looks only at taxes on wages while the rich primarily rely on investment income. However, unfortunately, we do not have reliable data on that going back very far into history. (Or, at least, I haven't been able to find it. If you know of a credible source that has it, definitely let me know in a comment!) The good news, though, is that generally speaking, the rate for the top bracket has tended to move roughly in the same directions as the other factors that determine the effective tax rates of the rich, so while this is not a great measure of the tax burden of the rich, it is better than nothing.

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GDP

GDP Growth vs. Tax Rate of Top Bracket

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