This post was submitted by Kaleberg.
In this post, I will look at the relationship between top marginal income tax rates and real GDP growth using a scatter plot.
I am inordinately fond of scatter plots. The nice thing about a scatter plot is that you can present a lot of data in a fairly small space, so rather than just comparing tax rates at time period t against real GDP growth rates from period t to t+1, I can also show real GDP growth rates from period t to t+2, from t to t+3, and from t to t+4. (I.e., the scatter plot shows tax rates at any given time, and the growth rates over one year, two years, three years, and four years.)
The vertical axis is the GDP growth rate, the geometric average for multiple years. The horizontal average is the top marginal tax rate. The one year comparison is shown in dark blue, and each subsequent year is shown with a paler color and a smaller marker.
Data is for the period from 1929 to 2009 (i.e., all the years available from the BEA.)
Lower top marginal tax rates seem to limit economic growth with a rate of about 60% seeming to divide the restricted growth phase from the unrestricted growth phase. There might be a little falloff when the tax rate passes 90%, or there might not. There are lackluster growth rates associated with higher and lower top marginal tax rates. Mediocre growth is not all that hard to achieve. Finally, if high top marginal tax rates had a multi-year effect, we’d see a distinctive pattern in paler blue in this chart, but we don’t. The paler blue, longer term comparisons seem bounded by the single year effect.
The data used in this scatterplot is the same data used to build the bar chart in this this post.
Note from Mike Kimel – as always, if you want the spreadsheet, send me an e-mail. I’m at my first name dot my last name at gmail.com, and my first name is “mike.” My last name has only one “m.”