History Does Not Show That Higher Taxes Hurt the Economy
Tax hikes hurt growth. Tax cuts spur growth.
In many circles, like Club for Growth or the the op-ed page of the Wall Street Journal or the Republican Party, this dual axiom isn't merely a working theory awaiting the introduction of further findings. It's a religious certainty that, like any religious certainty, is utterly impervious to evidence of the contrary.
As Bill Gale of the Brookings Institute pointed out at conference this morning, a central pillar of this faith is the Reagan tax cut and the ensuing boom. Supply siders use the production growth from the nadir of the recession to the peak of the mid-80s boom to demonstrate remarkable post-tax cut growth. But the better measure is to compare the 1980s to the 1990s, which began with back-to-back marginal rate increases on the rich.
Throughout 1980s, President Reagan took the top marginal tax rate down from 70% to 28%. The average growth rate between 1979 and 1989 was a sturdy 3.05 percent. In the early 1990s, Presidents Bush and Clinton raised the top marginal rate from 28% to nearly 40%. The average growth rate between 1989 and 1999: a slightly higher 3.23 percent.
Going back three decades, the five years of greatest GDP growth -- 1983-1984, and 1997-1999 -- occurred in years where the top marginal rate was 50% and 39.6%, respectively. Today it is 35%.
What does this prove? Nothing, is an acceptable answer. You could say that exceptional growth in the early 1980s was primarily a product of monetary easing after a Fed-induced recession. You could say that growth in the late nineties was the result of a tech boom, or bubble, that had little to do with fiddling with the marginal rates. You could say it's folly to consider top marginal rates in a vacuum, because average effective tax rates -- which include cap gains and dividend taxes -- are a better measure of tax burden. Twenty years of tax rates and economic growth offer a wide range of interpretation. But there is one thing you absolutely cannot say. You absolutely cannot say that recent history "proves" that higher marginal income tax rates destroy wealth and weaken the economy.
In the short term, I suppose this argument doesn't really matter. Congress is almost certainly going to extend the Bush tax cuts for a year in December. This is the only way for our electeds to shimmy, unscathed, between the rock and the hard place of higher taxes and deficit reduction. But next year, and the years after that, as lawmakers weigh entitlement cuts and tax increases to bring the long-term deficit back to sanity, you're going to hear a lot of doctrine about how raising taxes will destroy wealth and constrain growth. I don't know if that's wrong. But I'm certain it's not certain.