The battle lines have been
drawn between Republicans and Democrats on taxes. Democrats champion tax cuts
for people whose income is less than $250,000, which include about 98 percent
of taxpayers. Democrats (particularly, Senator Reid) hound Mitt Romney to put
out more years of his tax returns for public viewing--really dissecting.
Steadfastly, he's declined to comply, alleging he'd get hounded even more if he
did. On the other hand, Republicans are adamant for tax cuts for everyone, i.e.
including the very wealthy, the top 1 percent of taxpayers. But hush . . . both
groups are Keynesians (even Republicans who are loath to admit that publicly)
for advocating tax cuts to promote economic growth. At an intuitive level, no
one would argue with the idea that tax cuts put money in consumers' hands, some
of which they spend, thereby helping the economy grow. If the tax cuts favor
the middle class and the poor, they are redistributive from the rich (top 1
percent). No rocket science here. And it appeals to Americans' notions of
equality and fairness. In terms of equality, rich and poor Americans should be
treated equally (before the law), but before the IRS (International Revenue
Service), it is unequal treatment to tax one cohort, the middle class, more--while
Romney pays 13 - 15 percent, and some businesses (called persons) pay nothing,
but you (average Joe Blow) pay about 28 - 33 percent. Here from the Chicago Sun-Times (March 27, 2011) is a partial
list of "persons' that paid not taxes:
"1) Exxon Mobil made $19 billion in profits in
2009. Exxon not only paid no federal income taxes, it actually received a $156
million rebate from the IRS, according to its SEC filings.
2) Bank of America received a $1.9 billion tax
refund from the IRS last year, although it made $4.4 billion in profits and
received a bailout from the Federal Reserve and the Treasury Department of
nearly $1 trillion.
3) Over the past five years, while General
Electric made $26 billion in profits in the United States, it received a $4.1
billion refund from the IRS.
4) Chevron received a $19 million refund from
the IRS last year after it made $10 billion in profits in 2009.
5) Boeing, which received a $30 billion
contract from the Pentagon to build 179 airborne tankers, got a $124 million
refund from the IRS last year." (Source:
click here)
Fairness implies that taxing
the rich more is unfair because it punishes them for being who they are . . .
rich! There're problems at many levels here--cohorts are different for scads of
reasons--accident of birth, innate abilities, appearance, etc. But few are the
rich, I suspect, greeted by the sun at dawn who fret about breakfast.
Things are not often as they
seem. The world is complex and that forces us to drill below the surface of our
intuitions for answers. First, people behave differently in response to their
environment. In a complex world, oftentimes people seek complex methods to find
simple answers to questions shaped by intuition. For instance, I want to know
how people (taxpayers) respond to stimuli--that is, tax cuts. Do people work
harder if they are rich, or poor? I contend the answer is yes, economic status
matters. But I was not satisfied with just asserting that answer. I wanted
proof--not mind-bending mathematically sophisticated proof, but simple testable
data supported answers. Well, to support my approach choice, I invoked Occam's
razor, which says "the simplest explanation that fits the facts" is the best.
So, while it is true that many factors determine economic
performance--employment, investment, confidence, economic stability, even
perhaps geography, in the current political environment we are being led to
believe that the solution to the economic malaise is tax cuts. The political
conversation of the two presidential candidates is centered around the economic
merits of changing marginal tax rates.
So, ignoring other factors of growth, I looked solely at economic performance
in relation to marginal tax rates.
To address this conversation
with evidence, I sought out data online for real gross domestic product (GDP)
in 2005 dollars from 1913 to 2011. I also got data on top and bottom marginal
rates for the same period. Three graphs were developed from this data--one for
the Kennedy Administration, another for the Reagan Administration, and a third
for the Clinton Administration. Later in the analysis 100 years of data are
used to examine the effects of changes in the marginal tax rates on economic
growth in the long run. However, the actual statistical results were not shown but
can be requested from the author.
Again, there is a sense of universal bragging that cutting taxes ipso facto leads to economic growth. Yet, a plausible counterintuitive argument can be made that high top tax rates don't necessarily mean poor economic growth--don't believe me, just look at the Figure 3 for the Clinton Administration below. Note in the graphics below, TMTR is the top marginal tax rate line, BMTR is the bottom marginal tax rate line, and GDPGR is the real GDP growth rate line.
Figure 1 above represents
the Kennedy years (1961-1969)--though he died in 1963. The very top line is the behavior
of the top marginal tax rate from 1960 to 1969. The mid line is the bottom
marginal tax rate, and the last line at the bottom of the graph is the annual
growth rates of real GDP. Figure 1
show, too, that in the early years of the 1960s the top marginal tax rate was
in the stratosphere. The Revenue Act of 1964 reduced the top marginal rate from
91 percent to 70 percent, which resulted in growth rates of 5.3 percent (1965),
4.5 percent (1966), and 5.5 percent (1967). Note, rates were increased in 1968
and 1969 but economic performance just mirrored 1962 and 1963 when the top
marginal rates were 91 percent. The upshot seems to be that reducing the top
marginal rates spurred economic growth, but raising them a little had mixed
results. Of course, this questions the merits of the tax cuts absolutism as an
economic strategy in a small way. Republicans obstinately refuse to give, even
a little on this position. In their lexicon compromise--the given and take in
negotiation for the public good--is surrendering principles. This is commendable
only if it can be argued with absolute certainty that tax cuts have the effects
they assert--i.e. improve economic performance.
Figure 2 below depicts the
Reagan Administration and the steep cut in the top marginal tax rate from 70
percent to 50 percent, although the bottom marginal top rates (the second line)
went from 15 percent to 10 percent (not much of a change by comparison). The
effect of the Reagan tax cuts on real GDP growth (bottom line) was
spectacularly positive. It rebooted the recovery in 1982 in a way that saw a
whopping 7.18 increase in real GDP in 1984. However, further cuts in the top
marginal tax rates between 1986 and 1988 did not increase economic growth. Nor
did the increase in the bottom marginal tax rates from 11 percent in 1987 to 15
percent in 1988 change the real GDP growth rates. Here we begin to realize that
tax cuts do not draw a straight line to economic recovery, and might even harm
it. The story of the Reagan tax cuts seems murky. Trace the behavior of the
changes in the top marginal top rates and the bottom marginal tax rates on real
GDP performance (1982), and what you see is that in some years lower rates
produced worse economic performance, and constant tax rates correlate with
better GDP growth (1984). Once again a dogmatic adherence to tax cuts by either
side of the political aisle as a means to economic growth is not supported by
Figure 2.
Figure
2 Reagan Administration
Figure 2 confirms the
argument that there is little relationship between marginal tax rates at the
top and economic performance. To reiterate, the Reagan tax cuts were enacted in
1981 and by 1982 the economy took a nosedive. It recovered in 1983 and 1984 and output fell again and did
not rise much by 1989; raising the bottom marginal tax rate made no difference
for the growth rate of the economy in this instance.
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