A few days ago Greg Mankiw had an op ed piece in the NY Times talking about how even small increases in the marginal tax rate would keep him (and by extension, other talented folks like him) from working.
It turns out that the correlation between the tax rate in any given year and the growth rate in real GDP per capita from that year to the next is small but positive. That is, higher top marginal tax rates don’t seem to reduce real economic growth. Look at the tax rate and the annualized growth rate in real GDP per capita for two years, or three, or four, or five, or six (which is as far as I went) and ditto – the higher the marginal tax rate, the faster the economic growth over the next X years. The correlation is positive, if small.
Now, you may be saying to yourself – sure, but the world is very different now than in 1929 or 1942 or 1968. What about in recent times? So let’s start in 1981, which is more or less when a) the ideas that Mankiw endorses took hold and b) Mankiw’s career began. Here’s what that looks like:
Hmmm… a clear positive correlation between the top marginal tax rate and the growth in real GDP per capita over the next four years. Using three or five year lags decreases the correlation slightly but results are about the same. It would seem that discouraging Mr. Mankiw from working would be a very, very good thing for the economy. That shouldn’t come as a surprise to you if you’ve read my book and maybe I’ll write a bit more about this when I get a chance.
However, while it may seem like I’m being facetious about how discouraging Mankiw from working would be good for the economy, I really believe it. After all, Mankiw’s work consists in large part of advocating a position in his books, lectures, op eds, and as an advisor that, as the graph above shows, is consistent with slower economic growth, and he’s very good at what he does.