Tax-Rates and GDP

Over at Presimetrics, Mike Kimel has assembled a 7 part series on the history of Tax Rates and GDP.

[B]oth the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not remotely what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 and the 1981-1993 posts. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it. In fact, its worse than that… during the Reagan Bush 1 years, aside from that one good year, growth tended to shrink as tax rates were slashed.

This goes along with some of his earlier writing about the strange paradox of high top-marginal rates and high GDP growth.

I've pulled all these links together for my own use.  Feel free to use 'em too!

1. The Effect of Individual Income Tax Rates on the Economy, Part 1: 1901 – 1928
2. The Effect of Individual Income Tax Rates on the Economy, Part 2: The Great Depression and the New Deal, 1929 – 1940
3. The Effect of Individual Income Tax Rates on the Economy, Part 3: WW2 and the Immediate Post-War Recovery
4. The Effect of Individual Income Tax Rates on the Economy, Part 4: 1950 – 1968
5. The Effect of Individual Income Tax Rates on the Economy, Part 5: 1968 – 1988
6. The Effect of Individual Income Tax Rates on the Economy, Part 6: 1981 – 1993
7. The Effect of Individual Income Tax Rates on the Economy, Part 7: 1988 – 2010

And just for fun, here is a test that Dr. Kimel gave to a group of Poli Sci students. They failed.  And here is the post where he originally explored the problem.  And here's the data showing that the top marginal rate should be about 65% for maximum growth.  And one more here.

And why is this the case? Mike explores that here.