1940-1949 -0.101
1950-1959 0.006
1960-1969 -0.345 Kennedy/LBJ
1970-1979 -0.423 Nixon/Ford/Carter
1980-1989 -0.344 Reagan
1990-1999 0.684 Clinton
2000-2011 0.250 Bush
1930-2011 0.263
*author's computations
Eight decades since the last major U.S depression, we found ourselves in the throes of another huge downturn. Presently, we are emerging from it at a snail's space--unemployment is still high and economic growth is modest. The Norquist argument historically does not appear to be borne out by Table 1. First, over the long haul, 1930-2011 the relationship between MTRs and GDP growth rates is positive 0.263. This suggests that high MRTs and high GDP grow rates are positively correlated. One possibility for this is the policy prescription that reduces taxes when GDP falls and raises taxes when GDP rises--rather than lag responses of GDP to changes in tax rates. If one looks at each of the decades within this framework, some evidence of the idea that MRTs and GDP growth rates don't walk hand in hand is apparent for the decades of the 40's, 50's and 60's. But this is selecting the decades to make the case that MRTs and GDP growth rates are negatively correctly--lower MRTs (the Reagan and the Kennedy tax cuts) are good for the economy. But wait! Clinton raised taxes and Bush cut taxes--Clinton's economy took off; Bush's economy went bust. Table 1 appears to address this ambiguity slightly because there were periods where there was no relationship: the decade of the 1950s where the correlation was positive but almost zero.
This is not a lonely journey I embark on. A more formal study carried out by Christina D. Romer and David H. Romer (The Effects of Marginal Tax Rates: Evidence from the Interwar Era, March 2011) concludes, "We find little evidence of an important relationship, suggesting that the long-run productivity effects of changes in marginal rates may also be small." On the other hand, there is some ambiguity about the relationship between MTRs and GDP growth. For instance, a study by James D. Gwartney and Robert A. Lawson (The Impact of Tax Policy on Economic Growth, Income Distribution, and Allocation of Taxes, 2006) concludes, "high marginal tax rates--rates of 50 percent and above, for example--retard economic growth." So the rate has to be high; not 39.6 percent, even in this case to matter.
A quite legitimate conversation could be entertained from the point of view of the corrupting influence of high marginal tax rates. Indeed, high rates might lead to tax avoidance and evasion. The effects of corrupt practices can be seen from the following argument: economists have argued that corruption leads to the kinds of inefficiencies that reduce economic output. That's because resources that could be spent on productive efforts are misallocated to corruption related activities--i.e., tax evasion and avoidance. However, this is not the entire argument advocates of lower marginal tax rates make. They also argue that lower tax rates increase work effort--although it could be argued that the rise in disposable income from lower tax rates could conceivably reduce work effort. If you work hard to sustain a standard of living with which you are happy, a lower marginal tax rate could allow you to maintain that same standard of living with less effort. But the converse argument might also be true--higher taxes lead to more work effort because one would have to work harder to maintain the existing living standard.
Despite allegations of class warfare when demands are made for higher taxes on the people at the very top of the income ladder, there are differences between the rich and the poor. One way they are different is in what they consume, or more to the point how they are motivated to consume. Economists maintain that the marginal propensity to consume for rich and poor people is different. The poor have a higher marginal propensity to consume than the rich. The marginal propensity to consume refers to how much more you consume when your income rises by one dollar. In a recession, there is a greater need for consumption spending. This is a time when the loss of jobs reduces workers' consumption spending; when the loss of profits reduces business investment spending. And it is also a time when government spending runs ahead of government revenues because both workers and businesses do not contribute as much to government revenues in a recession. Transfers of income through tax cuts to the poor in this environment would increase their consumption on food, clothing, and shelter. This justifies tax cuts for the middle class and the poor. However, higher income through tax cuts for the rich might not even be consumed if they have all they want in terms of food, clothing, and shelter. So, an increase in taxes on high-end incomes would likely not reduce consumption at all. However, tax hikes on the rich would contribute to government revenues, and mitigate the effects of the recession on the government deficit.
Now unless you assume that high
marginal tax rates led to rampant corruption in the U.S., then a lower marginal
tax rate would at best only marginally raise output. Sure you could make the
argument that corruption is good because it allocates resources to people who
value them the most--for a side payment you can get to the head of the queue.
But this might only be good at the individual level. In general corruption is
collectively bad for the country in terms of its economic impact. Further,
corruption could imbed itself into the culture over time having lasting effects
on output. At any rate, people wish to minimize their tax liability at any
rate, whether rates are high or low .
Anecdotal arguments repeated ad infinitum take on a veneer of believability. This appears to be the case with the MTRs question. So if you want to make the Norquist case for MTRs cuts, you could fall back on the Kennedy and the Reagan tax cuts for support, that theoretically tax cuts increase output. No other evidence is required. Marinating a theory with anecdotes rather than scientific evidence is not the way to good economic policy. Norquist may have a stranglehold on policymakers, many of whom took his pledge, but there is disputed evidence that lowering MTRs increases economic output. Finally, it is of interest that the intransigence to higher taxes lives on. The conversation is over. The evidence: Norquist"s recent assertion that there is no need to think or propose a budget. All Norquist wants for the next president is someone with the digital dexterity to hold a pen and sign Representative Ryan's new budget proposal. However, one would hope our president is "made of sterner stuff."
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