Thursday, January 16, 2014

Does Higher Taxes Hurt Job Growth? Answer: NO

In his State-of-the-State address, Governor Chris Christie stated and often repeated claim that increased taxes hurts job growth. But is that true? What does the actual data suggest? 

Below is an abridged (not a Christie pun) answer to this question. It may be that other economists can point to other contradictory data, but when GDP growth is plotted against higher marginal tax rates for the rich, the resulting correlation strongly suggests that higher taxes on the rich are associated with expanding GDP and job growth. Please visit Mark Thoma's excellent Website, "Economists View", and read Ethan Kaplan's article in full.

Brian T. Lynch, MSW

Does Taxing the Wealthy Hurt Growth? (ABRIDGED)

by Ethan Kaplan (original article in full)

Much of the argument over tax policy in the United States is focused on whether the rich should be taxed at a higher or lower rate than they are today. The argument against higher rates is that raising taxes on wealthy would disincentivize the people most likely to create economic growth and thus jobs. This debate, however, is largely based on ideology rather than evidence. Unfortunately, it is quite difficult to figure out the impact of taxation on growth.

Nevertheless, looking at the raw correlation between top marginal tax rates and growth can be helpful for getting a rough sense of the likely impacts of higher taxation on growth. One recent paper by Pikkety, Saez, and Stantcheva looks at the correlation between top marginal tax rates and growth and finds the growth is higher when top marginal tax rates are higher. I restrict myself to the historical experience of the United States and go back to 1930. In particular, I took real chained per capita GDP growth from 1930 to the present from the Bureau of Economic Analysis' (BEA) website. The correlation over this period between the top marginal tax rate and output growth is strong and positive as can be seen below:

While we cannot say that there is a robust significant positive relationship between tax rates and growth, it is still interesting that regardless of when we start the sample, higher top marginal tax rates are associated with higher not lower growth. 

Moreover, a narrative reading of postwar US economic history leads to the same conclusion. The period of highest growth in the United States was in the post-war era when top marginal tax rates were 94% (under President Truman) and 91% (through 1963). As top marginal rates dropped, so did growth. Moreover, except for 1984, a recovery year, the highest per capita growth rates since 1980 were all in the late 1990s, after the top marginal tax rate had been increased from 28% under President Reagan to 31% under the first President Bush and then 39.6% under President Clinton.
... it seems likely that if raising top marginal rates did have a large negative impact on growth, we should be able to see it in the correlations. Thus, it also seems silly to argue that higher taxes on the rich have a large negative impact on growth, given that historically growth is, if anything, positively correlated with the top [higher] marginal rate.

What does this mean for public policy? ... if the historical evidence tells us that it is unlikely that taxing the wealthy has a large negative impact on growth (and it might even have a positive impact), shouldn't we increase rates on the wealthy from their current top rates of 35%?

p.s. the data used to analyze the time series is available on my website:

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