Lower Marginal Tax Rates Don’t Correlate With Increased Economic Growth
I was looking for some data on tax rates vs economic growth for a longer piece I’m working on when I came across this interesting gem by Mike Kimel, in which he runs the numbers and finds no correlation between lower top marginal tax rates and real GDP growth (at least, in the United States). He does this in the form of a classic economics style bet. It’s fascinating and well worth the read. Here’s the bottom line, though:
The way to read this graph…. consider the cell with t to t+3 on the horizontal and 50 years on the vertical. That cell has 62.1% in it. That indicates that of the 29 fifty year windows in which you can measure the growth in real GDP from a given year to three years later, 18 of them (or 62.1% of them) show a positive correlation between the top marginal tax rate. That is to say, in 62.1% of those windows, growth is faster when top marginal tax rates are higher than when tax rates are lower.
Notice… most of the squares have numbers above 50% in them. That means, in most situations we considered, more often than not, the correlations between marginal tax rates and growth rates are positive, not negative. When the negative correlations do occur, they tend to occur over the very short term. Put another way – they have negative repercussions that hit later. (And yes, that is what the table indicates.) Over longer periods of time, the percentage of time positive correlations are observed approaches 100%. This cannot in any way be reconciled with libertarian theory.
I have to admit that this is not the result that I would anticipate. But given the anemic economic growth we’ve seen since the last round of marginal rate cuts, it’s hard to be surprised.