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.

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The data used in this scatterplot is the same data used to build the bar chart in this this post.

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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.”

[...] Tax Rates v. Real GDP Growth Rates, a Scatter PlotCross posted at the Presimetrics blog. [...]

[...] Tax Rates v. Real GDP Growth Rates, a Scatter PlotCross posted at the Presimetrics blog. [...]

Do I believe my lying eyes or my own experience? I lived through 20 years of rapid economic expansion that occurred after Reagan cut the top marginal tax rates. Deficits dropped and by the middle of Clinton’s first term we were running surpluses. Bush and Obama presided over the biggest spending binge in U.S. history and the economy went into a deep and prolonged recession, the most serious since the 1930s. Our debt skyrocketed to over 4 trillion dollars and our annual deficits to 1.5 trillion dollars. How does this correlate with your data?

Craig Olson,

” I lived through 20 years of rapid economic expansion that occurred after Reagan cut the top marginal tax rates. ”

Yes, there were a few good years under Reagan. But don’t forget, by the time GHW Bush became president, growth had essentially slowed. Rapid growth only showed up again under Clinton.

Here are real and nominal growth rates straight from the BEA: http://www.bea.gov/national/xls/gdpchg.xls

“Deficits dropped and by the middle of Clinton’s first term we were running surpluses. ”

This piece of your recollection doesn’t match the data or my recollection of events. Here’s a post I wrote some years back: http://www.angrybearblog.com/2007/12/republican-party-and-national-debt.html

Here’s deficit data (real and nominal) straight from the OMB: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist01z3.xls

If your recollection still doesn’t match this, try searching for news stories from the time.

In looking at various other sets of data, and some formal papers, it seems that there isn’t a real strong correlation between the top marginal rate and GDP growth. What I haven’t seen yet is an assessment of total tax burden (local, state, fed) on GDP growth. That would seem to envelope the tax versus GDP growth question a bit better. Have do looked at this?

I’ve looked at the total Federal burden (i.e., more than just the marginal rates – what actually gets paid). You’ll find a number of posts at this blog on that topic, and also some commentary on that in the Presimetrics book.

I’ve tended not to focus too much on “state and local” (though there’s some of that in some posts too) since I’ve been more curious about the effect of the Presidency and the federal government.