Tax rates and economic growth in one graph

at 09:38 AM ET, 06/21/2011

Wonkbook’s lede this morning was about the possibility that Republicans are actually redefining tax increases as “new revenues that come from higher marginal rates” but not “new revenues that come from cutting tax breaks and closing loopholes.” If they are, then great. But it’s worth pointing out that it’s a bit of a weird thing to do.

There are good economic reasons to prefer raising revenue by flattening the tax code to raising revenue by hiking marginal rates, but many in the GOP take the argument much too far. In their telling, the economy begins to sound like a simple system with one decisive variable: tax rates. Here’s John Boehner: “We’ve seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes.”

But it’s very hard to find evidence for that view in the economy itself. Michael Linden at the Center for American progress graphed the economy’s average real GDP growth rate at different top marginal tax rates. Apologies to Speaker Boehner, but what we’ve seen over the past 30 years is that lower marginal tax rates have not led to particularly impressive economic growth, labor markets or revenues. Growth was actually more impressive back when marginal tax rates were higher:

I want to be very clear here: I am not saying, and no one should think, that high marginal tax rates drive growth. All else being equal, lower marginal tax rates are probably better for growth, though that can flip if they begin driving large deficits or starving important government functions. But what this graph suggests is that marginal tax rates don’t determine growth in either direction. As Linden concludes, “These numbers do not mean that higher rates necessarily lead to higher growth. But the central tenet of modern conservative economics is that a lower top marginal tax rate will result in more growth, and these numbers do show conclusively that history has not been kind to that theory.”

 
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