A Reflections of a Rational Republican reader suggested that I attempt to debunk or challenge the notion from two posts (see “Rich Peoples Taxes Have Little to Do with Job Creation” and “The Myth of the Lower Marginal Tax Rates“) at the The Center for American Progress that suggest higher marginal tax rates are associated with more job creation and economic growth.
Given the amount of data crunching involved and a number of other priorities, I have not yet had a chance to construct a detailed argument against the above claim, though I have several ideas about how to show that these periods of economic growth are likely earlier in the twentieth century when the United States was either at full productive capacity because of war, or it had less economic competition as economic competitors struggled to rebuild their economies. Furthermore, earlier in the century, the government spent a larger share of tax revenue on programs that were more conducive for economic growth such as defense and infrastructure spending vs. a budget today that has a far greater share of tax dollars allocated for entitlement programs and debt service.
In other words, the Center for American Progress reports take the numbers out of their historical contexts and assume that correlation implies causation. Alas, I will save this argument for another day, once I gather the appropriate data to prove (or disprove) my hypotheses.
However, the aim of this post is to share some results of my research that yielded nothing conclusive either way, but are nonetheless interesting.
One of my early hypotheses about why high GDP and job growth are associated with periods of high marginal tax rates, is that governments would tend to lower tax rates during periods of low GDP and job growth. As such, one would expect lower marginal tax rates during these periods. In other words, the Center for American Progress report has the causal relationship backwards, and seems to imply that lower marginal tax rates led to low GDP and job growth, when it should be the other way around.
To test this hypothesis, I plotted the marginal tax rate over the past 100 years against all the recessions over that period. Unfortunately, at first glance I could not see any discernible pattern between recessions and tax rates. That said, there may be a relationship between recessions, tax rates, and the President’s party. For instance, a cursory look at the data may indicate that marginal tax rates rise during and after recessions in which a Democrat is the President, while they fall during and after recessions in which a Republican is President. For instance, they rose under Presidents Wilson, Roosevelt, and Clinton, and fell under Reagan and George W. Bush. That said, they fell under Kennedy and even Obama, and rose under George Bush, Sr., so the relationship is murky at best.
Regardless, out of curiosity, I would like to solicit any thoughts about patterns readers might see in the data.