Tax Cuts Don't Lead to Economic Growth, a New 65-Year Study Finds

http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/

by aarghh • 14 years ago

66 67 14 years ago

theatlantic.com

lutusp3• 14 years ago

This is absurd. The tax increases may well have been in response to favorable economic conditions, in other words, an effect, not a cause.

I'm certainly not saying that's the only explanation, only that we don't know. But the article argues that the cause -- tax increases -- produced the effect -- economic growth. It is equally likely that the relationship is reversed.

This is what prevents economics from being a science, and why widespread science illiteracy makes us all fools.

aqme28• 14 years ago

Did you read the article? Thompson argues exactly what you're saying.

"Does this story prove that raising taxes helps GDP? No. Does it prove that cutting taxes hurts GDP? No.

But it does suggest that there is a lot more to an economy than taxes, and that slashing taxes is not a guaranteed way to accelerate economic growth."

lutusp3• 14 years ago

> Did you read the article?

Yes, and I also read the title and first few lines, which suggest a different conclusion than the article itself. This is a very common practice in science journalism -- the title and first few sentences lead the reader to one conclusion, and the body of the article is full of perfectly appropriate qualifiers that most readers never see or appreciate.

Roboprog3• 14 years ago

Let's try this then:

Assertion: "high" (greater than 50%?) marginal tax rates make economic growth impossible.

Evidence: Top tax rates between 1940 and 1980 were between 70 and 90%. Growth was higher than it was after 1980.

Conclusion: the assertion about the harmful effects of a high top/marginal tax rate is false. (I think this process is called "induction").

Note that this does not prove that high tax rates are beneficial, only that they are not harmful.

It's certainly possible that the general slowdown since 1980 is due to other factors, such as growing scarcity of cheap energy and other materials. But investigating alternatives will screw with the livelihood of somebody in the top 0.01% income earners, so one might argue it's harmful to your health to push too hard for such :-)

Roboprog3• 14 years ago

Note that I am NOT arguing for a linear relationship in any way, shape or form. Clearly, a tax rate that approaches 100% prevents any activity from taking place in the open.

Also, one could argue that a property tax would be better than an income tax as a way to enforce maintenance of the commons and to provide infrastructure and an educated work-force. (I tend to favor use of taxes as "investment", rather than "money for nothing")

tolmasky• 14 years ago

You began with the question of whether higher marginal tax rates made economic growth "impossible". After finding that there was growth between 1940 and 1980, you should have concluded "no, it does not make it impossible as we have a counter example". This follows and is called induction. But you for some reason chose to then alter the premise and say you proved that high marginal tax rates are not harmful. You have in no way proved this. For all you know without those high marginal tax rates, growth would have been even HIGHER between 1940 and 1980. I am sure you do not believe this to be the case, and that is a very reasonable belief, but understand that it is not proven by this evidence (nor is it disproven mind you).

True evidence-based proofs, the way its done with science, requires that you test one variable. In the example above you'd have to have a parallel economy where all else was the same except the tax rate. Unfortunately this is impossible, but this does not mean we get to change what "proof" means. Economics would work much better if everyone came to terms with the fact that it is untestable and was honest with themselves that all opinions regarding it are just beliefs, regardless which side you fall on.

yardie• 14 years ago

> tax increases -- produced the effect -- economic growth.

I don't see that in the title, in the summary, nor in the body of the article. How did you get to this conclusion?

Aloisius2• 14 years ago

I am shocked, absolutely shocked that the vast majority of economists have been right for decades. Next thing you'll tell me is that limited quantitative easing or government spending increases employment!

nirvana4• 14 years ago

I'm not at all surprised that people brought up on political propaganda think that this propaganda represents the opinion of the "vast majority of economists".

The reality is, anyone who knows anything about economics knows that taxes inhibit economic growth.

The idea that this is wrong, is so absurd that it should be laughed at.... only the problem is, most americans are absolutely ignorant of economics and thus can be tricked into believing it. Or in your case, assuming that "the vast majority of economists" think this, and have done so "for decades".

Frankly, it is astounding how much you have rejected economic as a science while thinking the partisan ideology you're pitching is "economics".

EricDeb2• 14 years ago

It does seem trivial that taxes stifle economic growth, however, isn't this under the assumption that people will spend the money they garner on tax breaks rather than sit on it? Although the government is laughably inefficient, wouldn't it be more productive to increase taxes and then have the government spend because the government is guaranteed to spend all of it?

seanmcdirmid4• 14 years ago

Any economist worth their salt knows that taxes may or may not inhibit economic growth. Taxes invested in infrastructure, security, and education may actually increase growth long term. Taxes wasted on corruption will most definitely hurt growth. Property taxes also encourage people to put properties to work, inheritance taxes encourage more dynamism between the generations (discourage old money aristocracy), and so on. Overly harsh taxes on the rich will also encourage avoidance (honest or dishonesty) and migration (negotiate your own rate with a swiss canton), while regressive taxes on the poor will lead to riots and revolts.

Societies are complex systems and managing them efficiently is actually (gasp) quite difficult.

mhartl3• 14 years ago

Happy to hear it. I think it's time to try a 100% tax rate and see how that goes.

ekianjo3• 14 years ago

Agree. Let's ban profits altogether, punish companies daring to fire people by putting their CEOs in jail and then nationalize their assets, redistribute all money around all classes of societies to remove once and for all the inequalities of life, providing government jobs for everyone and we will be closer to a real paradise on Earth.

Oh wait. Russia tried that. For more than 65 years. It did not work too well for them.

Roboprog3• 14 years ago

Of course, one could look at some of the Northern European countries that are neither purely communist nor purely private property capitalist, and consider the possibility of a happy middle between a communist dictatorship and a banana republic style oligarchy.

How do you expect to create a fabulously wealthy startup if you are the child of an "untouchable" caste with 0 initial resources???

rayiner• 14 years ago

> Oh wait. Russia tried that. For more than 65 years. It did not work too well for them.

You might want to learn a little bit of history before spouting off the conventional wisdom you learned in 8th grade.

Russia for hundreds of years was a total backwater. At the turn of the 20th century it was incredibly far behind the rest of Europe. Under communism Russia became an industrialized superpower that rivaled the US. Ultimately the communist system collapsed, but partially because of its own success. The impoverished denizens of pre-Communist Russia had never been able to force democratic reform, but with the economic growth under communism arose a commercial class that was able to force some level of democratic reform.

melvinram2• 14 years ago

As you likely recognize, that's a completely irrelevant point. To demonstrate: let's try 0% tax and see how that goes.

Like other things in economics, there is an elasticity to the impact of reducing taxes. Going from 80% to 50% makes a big difference. Going from 35% to 39%? I'm not sure it packs the same punch.

mhartl3• 14 years ago

Of course a 100% tax rate is absurd, but it's not completely irrelevant. In particular, I bet that the current total effective tax rate (including not just income taxes but also FICA, sales tax, property tax, and implicit taxes from market interventions such as farm subsidies and the minimum wage) is already supra-optimal for economic growth. A wise and just sovereign—such as a time-teleported and quickly-brought-up-to-speed Marcus Aurelius—would likely find that he could increase tax revenues by lowering (and streamlining) tax rates across the board.

zeroonetwothree2• 14 years ago

A 0% tax rate would certainly work better than a 100% tax rate. After all, we had no income taxes until the 20th century.

joshuaheard• 14 years ago

I've been looking for reasons to retire, and if the tax rate were 90%, I'd be out.

yen223• 14 years ago

Luckily no one is proposing 90% taxes then.

Gustomaximus2• 14 years ago

Do you understand marginal tax rates? Hypothetically if tax rates did move to 90% on personal income this would most likely be triggered on such a high tier of income you would already be working because you want to, and not for financial need. Also once you average out the tiers leading to 90% you will pay a lot less than this 90% you're throwing out there.

Edit: spelling

ArmstrongRSBC• 14 years ago

We are running a massive balance. We have a tremendous national debt.

Our economic growth hasn't been paid for yet.

EricDeb2• 14 years ago

Agreed. Lets cut defense and military spending substantially.

mpyne• 14 years ago

Yes, because summarily removing all of that spending would certainly have no drastic follow-on effects to the national economy.

mcenedella• 14 years ago

This article well illuminates the dictum to beware analysts picking their own time horizons. Calculating impact from five-year growth rates is problematic for business cycle, responsiveness, and exogenous factors.

Cato's reply is here: http://www.cato-at-liberty.org/tax-rates-impact-economic-per...

curt4• 14 years ago

Please know that in periods of "high personal tax rates" business owners declared their income through their companies thereby lowering their tax rates. You would have a company car, company vacation, company dinners, you can even make it company policy to pay for the employees children college education, etc... This is the same reason any comparison of income equality over time is meaningless. Since income was declared through different avenues.

To understand the tax implications of economic growth you have to look at the tax payments as a percentage of GDP as well as compliance costs. In the US tax payments have held steady at about 18% of GDP since WWII until recently. People hunt for loopholes no matter what. But when rates are low you don't have to look for loopholes, so you can deploy your capital more efficiently. Thus generating economic growth. This is why tax cuts often stimulate large economic booms. Capital that was sitting in say tax-protected muni bonds will move into the market and be deployed for business expansion and thereby hiring.

There's so much evidence to the contrary of this article, even Obama's own counsel of economic advisories share the view that tax cuts stimulate economic growth. Christina Romer, his former advisor wrote a paper on the subject. What they do is look at country around the world to collect more data points for a better regression analysis.

Also note that when you say "tax cuts", not all tax cuts are made equal. For a tax cut to be effective it needs to change long-term behavior. So credits and such have a near zero or negative effect while rate cuts have a positive effect. The most beneficial being capital gain rate cuts (ie every time they have been cut, revenues from the tax have increased), corporate, and then final income tax rate cuts.

-Really going to down vote me without refuting any of what I said.

btilly2• 14 years ago

That is a strong set of claims, and as long as you hold it, you are utterly to any set of facts that might dispute it.

According to IRS figures, the top 400 tax payers today pay income taxes below 16%. According to the best available figures, the top theoretical tax rate during the 1950s was over 90%, but the average tax rate paid by the top approximately 400 people was 51.2%. Obviously they used a lot of tax loopholes. Obviously they still wound up paying, in real taxes, a lot more than the very rich to today.

Of course if you refuse to believe that the real figures were reported to the IRS, you can believe any figures that you want. But it is pretty hard to reasonably come to the conclusion that the rich today are paying similar tax rates to the rich 55 years ago.

As for taxes and economic growth, it is a trivial piece of economics to conclude that collecting more in taxes immediately takes money away from the economy. However it is only slightly less trivial to conclude that the amount of damage it does is proportional to how likely that money was to get spent. Given that the poor are likely to spent more than the rich, that means that we should prefer to tax the rich more.

Therefore if you're going to levy taxes (and there is no reasonable way to avoid the need to), it is more efficient for all of us to tax the rich more heavily. Instead of taxing them less, which is what they keep telling us we need to do.

(I, along with many of the people on this site, pay a greater fraction of my income in taxes than Mitt Romney does. But is this really good public policy?)

curt4• 14 years ago

>the top 400 tax payers today pay income taxes below 16%. According to the best available figures, the top theoretical tax rate during the 1950s was over 90%, but the average tax rate paid by the top approximately 400 people was 51.2%.

Big problem... You're comparing two completely different things. The 16% number is based on the fact that most of the wealth earn their income through capital gains which is taxed at a lower rate. So you're comparing income taxes to capital gains taxes. Two completely different items, apple to oranges.

> But it is pretty hard to reasonably come to the conclusion that the rich today are paying similar tax rates to the rich 55 years ago.

You're second point is also wrong. The rich actually pay a higher percentage of the tax burden when rates are cut. Look at the 20's. Taxes were slashed and the percentage of the income taxes paid by the rich doubled. Same today happened with the Bush cuts. The top 10% pay 71% of income taxes, and top 1% around 40%. Here's a chart to show you: http://www.heritage.org/federalbudget/top10-percent-income-e...

How much more exactly should the rich pay?

As for capital gains. You don't want to raise it, unless you're out to punish the rich, since when it's lowered it generates more revenue. When it's increase, it generates less.

tsotha• 14 years ago

>According to the best available figures, the top theoretical tax rate during the 1950s was over 90%, but the average tax rate paid by the top approximately 400 people was 51.2%.

Yeah, but 51.2% of what? The key to the real tax rate is all in what gets counted as income. Back then the IRS didn't count a company car as income, whereas today it is. In 1986 Congress added a whole lot of rules to eliminate methods people were using to shelter income, so if tax rates were raised back to 1960 levels the government would be taking a much bigger bite from everybody's income.

saraid216• 14 years ago

> You would have a company car, company vacation, company dinners, you can even make it company policy to pay for the employees children college education, etc...

Isn't this "economic growth"?

curt4• 14 years ago

I was referring to how you can't compare specific tax rates over large differences in time since behavior changes. Instead you need to look at tax burden through GDP and compliance costs.

But to answer the question, all that's doing is displacing economic "growth". Moving it from one hand to the other. Business instead of personal.

nirvana4• 14 years ago

Also, worth noting that the "tax cuts" they are opposing in this election cycle are the ending of the cuts put in during Bush. Those cuts reduced the tax rate for the poorest people in the country by %50, from %15 to %10, and for the richest by %3, from %39 to %36.

When you take %50 more of a poor person's income in taxes, you take money they need to live, and this will hurt the economy, both because they can't spend it, and also because some of them will be forced to make less beneficial choices, merely to survive.

Meanwhile, the effective reality is that inflation is a tax. Since inflation devalues the dollars in circulation, the deficit spending that the "anti-tax cut" crowd tends to want to do is really just another form of tax.

Taxes themselves are better, because they don't rely on obscuring the fact that your being taxed (By changing the underlying value of money) and thus they tend to cause fewer bad decisions on the part of economic actors.

Many people make bad investments (eg: houses) thinking they are getting a positive return, when in real dollars they are not. (Houses don't appreciate, the dollar devalues.)

fauigerzigerk3• 14 years ago

Inflation is not a tax for everyone. It's actually a tax cut for debtors. The U.S as a whole is a country of debtors. The balance of payments is negative as well so it's getting worse. The worst thing that could happen is deflation. Inflation is a net positive in this situation.

The effect of inflation on working income depends on whether or not wage inflation is above or below CPI.

Gustomaximus2• 14 years ago

IMO your key comment is "not all tax cuts are made equal".

What we need to consider is, from a fiscal stimulous POV, the objective of raising or lowing taxes is to get money moving around the economy at all levels. This can happen with either tax cuts or tax increases. For example tax cuts on home building is a classic way of freeing and encouraging investment in a sector that tends to flow across the wider economy. Whereas giving some kind of tax cut to a person or entity that will just hoard that gain will not help the economy. Also increasing taxes is fine, but then the pending needs to be more useful to the economy than leaving the money in the hands of private citizens. For example if you are taking that amount from where it will be hoarded or invested away from the wider economy it can be a good thing for the economy. So if Obama increases tax on the wealthy people (of which a proportion will hoard) and puts it into infrastructure type projects it should benefit the economy. Whereas if the money gets spent on supporting Afghanistan, that same tax cut would hurt the economy as the proportion of funds that would have been invested in the local economy are removed to another location.

For my limited understanding this data may just be a sign that wealth is being hoarded from the wider economy currently, not that high or low tax rates are better. Unfortunately when it comes to economics there are so many variables in play it is very limiting to take a this side or that side stance.

fauigerzigerk3• 14 years ago

Tax cuts for those who save money (i.e the rich) will stimulate growth only if others want to borrow that money in order to do something productive. That is, if growth is held back by lack of investment capital.

If growth is held back by lack of demand, cutting taxes of savers and financing it by cutting public services for consumers will be a drag on the economy.

Right now, capacity utilization is low and therefore we don't need investment in new capacity. What we need is demand and we won't get it as long as disposable incomes keep going down as they have been for over a decade.

jacques_chester• 14 years ago

The headline is needlessly inflammatory.

A better headline might be "tax rates and growth only poorly correlated in one particular country in a limited period with the highest rate of technological change in recorded history".

zeroonetwothree2• 14 years ago

The number of significantly different tax policies over those 65 years is very small--less than a dozen. So concluding anything from such a small number of samples is impossible. Thus it's not surprising they find "no correlation" between taxes and economic growth.

udpheaders• 14 years ago

Next week: Economic Growth Doesn't Lead to ________, a New 65-Year Study Finds

Fill in the blank.

Do people want "economic growth" or whatever that might be assumed to lead to, or do they just not want to donate money to their country through their government?

One is kind of indirect and speculative, the other is direct and immediate.

seagreen• 14 years ago

Just a reminder that since there's actual power at stake here (votes) it takes extra work to write a quality comment on this kind of article. The difficulty is equivalent to trying to have a discussion where some unknown but real amount of money will go to the political party whose policies are closest to those advocated in the top rated comments. This makes it genuinely hard to think clearly on this kind of topic.

Because of this it's extra important to be non-partisan, which is hard. Try it though, it's a fun exercise!

My comments: I strongly agree with one of the conclusions of the article, that we should be "humble about taxes as a tool for growing the economy." However, I'm suspicious about their reasoning. I'm not a statistician, but doesn't a sample size of one seem a little . . . low to anyone else? It seems fairly likely to me that if you examined more situations, you would find that taxes are generally not a tool for growing the economy, are sometimes beneficial, and are sometimes strongly detrimental.

For instance, say you're running a city-state in East Asia. Given that you're competing against Hong Kong and Singapore, I'd guess that low taxes would be essential to economic growth. On the other hand, say you find yourself in charge of Somalia now, or Poland in 1938. I don't know about you, but personally I'd really be digging the infrastructure/tanks respectively.

This makes me pessimistic that accurate conclusions can be drawn from a study like this. For instance, say you're rich in 1960s America but you don't like the high taxes. Where else would you go? Now there are lots more options.

nnnnni• 14 years ago

It took a 65-year study to prove something that should be obvious to anyone with a little bit of common sense?

onetwothreefour• 14 years ago

LOL. No shit.

No one actually thinks this. It's called pandering to the base.

Tax Cuts Don't Lead to Economic Growth, a New 65-Year Study Finds

Related Stories