Evolution

In November of last year I came upon a comment at truthout that led back to this post by Chip Shirley:

11/17/10

Conservatives have no answer to this question!

They can't explain in their economic policy how America did most of the great things we have ever done (and paid for them) between 1940-1980 and the whole time our federal income tax on the most wealthy citizens was DOUBLE TO TRIPLE what it is today while our deficit and debt were nill compared to today. Conservatives have no answer to that question!

In comments on mine of 21 November I evaluated Chip's theme:

... in those postwar years when the economy was doing really well, taxes on the wealthy were very high by our standards. This shows that such taxes do not ruin a healthy economy.

On the other hand, I don't think it shows that high taxes on the wealthy will restore health to our economy...

As an afterthought I would add: In order to think that high taxes on the wealthy will restore health to our economy, you have to think that the federal debt and deficit are the cause of our economic troubles.

I do not agree that the federal debt and deficit are the cause of our economic troubles, and everything I do on this blog is dedicated to that proposition.

High taxes do not ruin a healthy economy. But this does not mean that re-instituting high taxes on the wealthy will restore economic health.


At Twenty-Cent Paradigms, Bill C writes:

Fairness is in the eye of the beholder, but the US economy actually grew faster when top marginal tax rates were higher. Here is the annual average growth in real GDP and the average annual top marginal tax rates for the US, by decade:

1951-60 - 3.42 - 91.2%
1961-70 - 4.11 - 78.4%
1971-80 - 3.14 - 70.0%
1981-90 - 3.21 - 44.5%
1991-2000 - 3.22 - 37.9%
2001-2006 - 2.51 - 36.2%

Accompanying the article is a nifty interactive graphic with the top 30 all-time richest Americans. Bill Gates is the one in the pink polo shirt...

It is a nifty graphic, and it shouldn't be missed.

But I liked Bill C's table showing real GDP growth by decade. And I thought the third column, the tax rate column, was an interesting addition to the table. But then, I'm slow to draw conclusions from such things.

As I suggested in a comment on Bill's post, I think it unwise to present the information that way. It looks like some sort of causal relation, as if high taxes cause improved economic growth, and I think that is completely ridiculous.

People will think there is a cause-and-effect relation between high taxes and a healthy economy.


It is one thing to say the economy grew faster when tax rates were higher. It is another thing entirely to say the economy grew faster because tax rates were higher. At Econospeak, in a comment on the post John Taylor on Pawlenty’s 5% Growth for a Decade Claim, Exl Blogger writes:

The problem is that you can't get high rates of growth without high marginal tax rates. Look at history. That's a simple fact. Sure, 5% growth would be nice, but it would take a much higher tax rate than would be politically acceptible.

"You can't get high rates of growth without high marginal tax rates."

So now the concept has evolved into raising tax rates to make the economy grow. The cause-and-effect relation is in full bloom. But it is wrong, just so wrong. And again, it is based on the flawed premise that balancing the federal budget will fix the economy.


Having said that, I will completely contradict myself and tell you how high taxes could be good for economic growth. But first, you have to give me control of your taxes. I will control the horizontal. I will control the vertical. I can roll the image, make it flutter. I can change the focus...

Suppose I gave you the choice, that you can keep the tax system you have now, or instead I will tax you only on the money you save and not on any money that you spend. So that if you don't save any money at all, your taxes are zero. And if you only save a dollar, your tax cannot be more than a dollar.

I don't know which tax you would choose. But I think a lot of people would go for option B: Only tax me on what I save.

Well, that's what the corporate tax is like.

Why? To stimulate growth. To get them to spend, and spend more.

Now, if I make the tax rate really really low, you (and corporations, too) might choose to save a few dollars even though you have to pay a few cents tax on that saving.

But if I make the tax rate really really high, pretty sure you will spend every last dollar, just to avoid the taxes.

So if wealthy people have their money tied up in corporations, and if you want them to spend it, then you should raise the tax rate really really high.

Evidence, you say? You want evidence? Not saying I buy the causal relation myself, but I'll give you evidence.

Bruce Bartlett is a hair on the tail that wagged the dog and gave us supply-side economics. Bartlett writes:

Unfortunately, there’s no evidence that the 2003 tax cut did anything to stimulate corporate investment. Indeed, according to the Federal Reserve, nonfinancial corporations have increased their holdings of liquid assets to $1.8 trillion from $1.2 trillion since 2003. Thus it’s implausible that a further reduction in the corporate rate, as Pawlenty and other Republicans favor, would do much to raise investment.

Since 2003, when taxes were cut on the money they don't spend, nonfinancial corporate savings increased by 50 percent. How much did your savings increase?

For what it's worth.