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A couple of weeks ago I had a post on the Presimetrics blog, also on the Angry Bear blog looking at economic growth rates and political parties. The post shows that from 1929 (that’s as far back as GDP goes) to 2009, growth in real GDP per capita was faster when the president was a Democrat than when the President was a Republican. Furthermore, growth was faster for Democratic Presidents who faced a Democrat-majority Congress during their entire term than for those who did not face a Democrat-majority Congress for at least part of their administration. Similarly, Republican Presidents facing Democratic majority in Congress during their time in office tended to better than Republican Presidents facing Republican majorities for most or all of their term. It isn’t a message you’ll hear very often, but it is the only one that is compatible with the data, as you can easily check yourself.

In this post, I want to look at one of the major distinctions between Democrats and Republicans, and that is tax policy. Let’s start by looking at the Federal tax burden (total Federal government current receipts / GDP) by President. The data comes from the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables. Federal government current receipts were pulled from line 1 of NIPA Table 3.2, and GDP comes from NIPA Table 1.1.5, line 1. (Note – this is slightly different than the way we do it in Presimetrics but it is nice to change things up now and make sure that results don’t change.)

The graph below ranks the Presidents by the annualized change in the tax burden. The change is measured from the year before a President took office (the “baseline” level) to his last year in office.


Figure 1.

(As is my practice in these posts I tend not to include the years through 1938 for FDR because otherwise someone is going to claim that whatever happened while FDR was in office was due entirely to World War 2.)

The graph shows that there is some correlation between the parties and changes in the tax burden. Every single Republican president for whom there is data reduced the tax burden. Conversely, every Democrat except Truman has raised the tax burden. Obama, at least during his first year, is on track to follow Truman and lower the tax burden.
The next graph shows growth rates in real GDP per capita (obtained from line 10 of NIPA Table 7.1)


Figure 2.

The graph shows very clearly that Presidents who hiked the tax burden produced faster economic growth – by far – than the Presidents who reduced the tax burden.
And should there be any tea-partiers reading this, yes, in his first year, Obama cut the tax burden. A lot. The so-called stimulus package involved a lot of tax cuts. But as I’ve already noted, to get out of a recession, government spending has historically been much more useful as a stimulus than tax cuts.

Here’s another way to look at things:


Figure 3.

The graph below repeats Figure 3., but it includes a few labels if you want to know which point represents which President.


Figure 4.

In any case, it’s pretty clear that if lower provide any benefits to economic growth, those benefits are extremely well disguised. In fact, it appears that lower taxes are a prescription for slower, not faster economic growth. (Try reconciling the data with Republican, libertarian, or Austrian economic theory.)

Now… I do not believe that higher taxes, in and of themselves, are a cause of faster economic growth. In the book we suggest a few reasons why higher tax burdens might correlate with faster economic growth. But since the book went to press, I’ve had a bit of time to think about ways to test some of these ideas, and I’ve come up with a few new thoughts as well. I hope to try out a few of these ideas in blogs in future posts.

posted by Mike Kimel, 6/13/2010
update… the paragraph before Figure 1 was slightly modified for clarity.

posted Mike Kimel, 12/13/2010
corrected this erroneous sentence: “The graph shows very clearly that Presidents who hiked the tax burden produced faster economic growth – by far – than the Presidents who hiked the tax burden.” Thanks to reader Movie Guy for pointing out the error.

22 Responses to “Presidents, the Tax Burden, and Economic Growth”

  1. Ryan F. says:

    I am fairly confident that Mike’s conclusion is correct. However, he should address the possibility that the causation goes in the other direction – i.e., one could argue that maybe Presidents confronted with a weak economy tend to cut taxes as a countercyclical measure. This appears to be the case with Obama. I guess to do that you’d have to go through each tax cut and the economic conditions existing before and after the cut.

    On an unrelated note, I keep thinking that even this analysis doesn’t give the Dems enough credit. Investment in public infrastructure tends to have very high returns (see http://aysps.gsu.edu/isp/files/ispwp0912.pdf), but these returns only materialize over time, not necessarily during the term of the President who enacted them. I’m assuming Dems to more of this, but I imagine that’s a pretty safe assumption.

    But maybe you’re already planning to get to that.

    • admin says:

      Ryan F,

      I’ve looked at causation in a few posts at the Angry Bear blog, but I cannot find that post just now. I’ll have look again and perhaps redo it some time soon. Essentially, I broke each four year term into two terms, and looked at tax changes in the first half and growth in the second half. Then I reversed things, and looked at growth in the first two years and tax policy in the second two years of each four year group. As I recall (and I’m working from memory here – its possible I’m wrong) causation goes from tax policy to growth more than the other way around. I guess this should go on the list of things to redo sooner or later.

      In the book Michael Kanell and I have a simple model that tries to explain growth. A couple of the factors that affect growth are changes made during the previous administration. One of those previous administration variables is something we call “investing in the future” which includes investment in infrastructure. That is something I hope to revisit in this blog, perhaps using additional data and a longer time series.

  2. [...] post also appears at the Presimetrics Blog. It contains some information that has appeared in a few different Angry Bear posts, but I think [...]

  3. [...] post also appears at the Presimetrics Blog. It contains some information that has appeared in a few different Angry Bear posts, but I think [...]

  4. TheNumeraire says:

    There is far less correlation between INCOME tax hikes and growth in federal receipts/GDP as inferred in your post.

    Growth in receipts during the FDR era came not from income taxation but from other taxes such as excise taxes. Income tax revenue was a far smaller percentage of total federal tax revenue from 1932 through 1939 than during the prior period of lower marginal tax rates. For example, total federal tax revenues were nearly identical in the years 1931 and 1934. However, income tax revenues made up 58% of total revenue in 1930, but just 26% of total revenue in 1934. (Source: The Federal Income Tax, Blakely & Blakely; pg.560; published 1942).

    Not only did revenue from income tax stagnant in percentage terms it also stagnated in absolute terms. By 1936 total income on individual tax returns was still no higher than as arly as 1925 (the year the top rate was lowered to 25 percent) — despite the fact that more individuals were required to file a return!

    In 1925, 2.5 million returns contained 17.38 billion in taxable income. In 1936, 2.86 million returns yielded only 14.22 billion — in 1937, 3.37 million individual returns totaled 15.26 billion. Also in 1936-37 there were only 61 and 49 individual returns with income of at least $1 million — by comparison those same figures for the years 1925-1931 were 207, 231, 290, 511, 513, 150 and 77. When taxes rates were jammed higher in 1932 the number of $1 million incomes declared on individual tax returns shrunk to only 20 and did not exceed 1931 levels (77 filers) at all during 1932-1937, despite soak-the rich tax rates.

    Bottom line: revenues under FDR did not grow from income taxation therefore any correlation between income tax rates and total federal receipts is hardly evident. The increase in tax revenue instead came from excise tax hikes, new taxes (e.g. Social Security) and from pushing more taxpayers onto the income tax rolls by lowering the standard deduction and increasing the bottom rate from 1 to 4 percent.

    • admin says:

      The Numeraire,

      I’ve noted this in reply to another of your comments, but Michael Kanell tend to focus mostly on the tax burden and not marginal tax rates. As you point out, the government can collect from many sources. We look at all revenues (including from “taxes” that go by other names) rather than income taxes only.

  5. TheNumeraire says:

    The LBJ era includes a 30 percent across-the board tax cut to all individual tax brackets. How does your “higher taxes equal more growth/more revenue” hypothesis deal with this apparent contradiction?

    The Clinton era tax hikes are hardly responsible for the surge in receipts/GDP — if they were, there should have been an immediate surge in receipts/GDP in the years following 1993. Instead, receipts /GDP grow fastest from 1997-2000, i.e. AFTER the 40 percent cut in the capital gains tax rate. Revenue from realized capital gains averaged 5.4% per year from 1997-2000 — from 1987 -1996 (the years in which the cap.gains rate was 28 percent) realized capital gains are only half that figure as a % of GDP. The high tech boom also provided a tax windfall as employees of almost all income classes cashed in stock options and payed top bracket tax rates on their sudden windfalls (which are taxed as ordinary income on W2 forms). When the NASDAQ changes trajectory in mid-2000, revenues from these two sources decline precipitously (although capital gains revenue remains well above the 1987-1996 average).

    • admin says:

      Jeff Hoberg,

      You mistake marginal rates for the tax burden. They are two separate issues. Changes to marginal rates are announced loudly. Changes to the tax burden are as much about enforcement as anything else.

      Consider… the tax burden rose every single year of the Clinton administration, despite the fact that the marginal tax rates only rose once. The tax burden even rose the year that the cap gains cuts fell.

      Conversely, the tax burden fell in the elder Bush’s last three years in office.

      I worked for a Big Accounting firm just long enough to learn that a) nobody with resources pays the marginal rate on much of their income and b) enforcement is what drives collections.

    • admin says:

      No contradiction. You’re talking about marginal tax rates. I’m talking about the amount that was actually collected. That depends a bit on marginal rates. It also depends on enforcement.

  6. TheNumeraire says:

    Actually, tax rates are more indicative of the tax burden than ex-post receipts, for obvious reasons. Otherwise, one could claim that a ridiculously high marginal income tax rate or tariff that was so prohibitive to commerce or industry that it failed to produce any tax revenue was producing a very low tax burden. Tax receipts are the result of economic activity, if the rate(s) are less of a burden on an economic actor, he/she will likely choose to produce, consume or take risks in such a way that total economic activity increases, resulting in greater tax receipts from the incremental economic activity.

    This is very clear in the historical data which demonstrates that most of the increase in receipts/GDP comes not from higher marginal tax rates, but from expanding the tax rolls among the lower income/consumption ranks (or in the 1997-2000 example a one-off investment boom). When tax receipts/GDP expanded during WWI, the 1930′s and WWII it was the result of expanding the individual tax base, not from taking a larger share from the increase in the highest marginal brackets (a wide variance of data proves this. The same thing occurred in the 1970′s, except in that instance the tax hike was an unlegislated one — the result of rapid inflation pushing against an unindexed income tax code.

    What has actually been happening since 1980 and especially since 2001 is the exact opposite of the aforementioned trend — the number of taxpayers has been shrinking, owing largely to the hefty increase in refundable tax credits. Hence the reduction in what you refer to as the “tax burden”, even though the federal government collects a historically large portion of its receipts from high incomes and realized capital gains.

  7. TheNumeraire says:

    I’d like to add that it is absurd to think that because federal receipts were low in 2009 it is due to a low tax burden. I believe it is more correct to assume that receipts were low due to the fact that in 2009 business income turned into business losses and an unemployed, underemployed and less robust workforce produced less income and bonuses.

    The so-called Obama tax cut (which is mostly refundable tax credits that resemble welfare payments) only amount to $162 billion or a little more than 1% of GDP (according to recovery.org).

    • admin says:

      TheNumeraire,

      You seem to assume that tax burdens fall automatically whenever national income falls. You can believe that if you’d like, but it isn’t the case, despite the fact that it is orthodox policy to cut taxes of various sorts in a recession. Real gdp per capita fell 19 times between 1930 and 2009. In five of those instances, the tax burden rose. Heck, the tax burden rose in ’33 when FDR took office in the teeth of the Great Depression.

  8. TheNumeraire says:

    It would be interesting to see some data and information displaying some correlation between tax enforcement and receipts/GDP.

    Are you suggesting that during the FDR admistration income tax enforcement was greater, despite the lack of income tax revenue? Was there a lack of enforcement in the 1950′s when receipts/GDP were no higher than under the Reagan administration? Are you suggesting that the increase in revenues late in the Carter adminstration are owing mostly to enforcement and not to the effects of inflationary bracket creep?

    • admin says:

      TheNumeraire,

      In the book we point out that marginal rates don’t affect the economy. Thus, we focus on tax burdens. We define them slightly differently in the book than I do in the post, but it amounts to more or less the same thing.

      And you are not thinking about them the way we are. The average tax burden (using the definition in the post) in the 50s was 1.5% lower than in the 80s. That means that despite the fact that marginal income tax rates (and I believe some other fees and taxes such as social security taxes) were much higher in the ’50s than in the ’80s, a lower percentage of the national income was being collected in the ’50s than in the ’80s.

      There were several reasons. And yes, enforcement is a big reason. Remember… Kennedy had a number of initiatives to ensure greater compliance that have stayed in place ever since. I imagine simply requiring everyone to have a single taxpayer ID (not the case before JFK) put a big dent in income simply not being declared.

  9. Ryan F. says:

    Admin,

    That does adjust the meat of my concern.

    Would it not also be sort of theoretically thorough to estimate an average return to public infrastructure (easier said that done of course, but you could certainly put together a plausible range), and credit that back to the government under which such investments were made? That’d be hard but could be really informative and would mostly likely strengthen your case.

  10. TheNumeraire says:

    Hardly surprising that tax receipts could rise during a decline in real GDP (recession) considering that tax receipts are derived from nominal economic activity and a recession in measured in real terms. A wide enough gulf between nominal and real gdp (i.e. inflation) would demonstrate higher nominal tax receipts, depending on the severity in the decline in real gdp.

    To claim the tax burden rose in 1933 is ridiculous. The NIPA tables demonstrate that the increase in tax recieipts stems entirely from an increase in excise tax receipts and an recovery in corporate tax receipts owing to the end of the economic decline. Excise taxes were raised sharply in 1932 and had a negative effect on growth in 1932 (the worst year of the depression). Corporate tax receipts began to recover with e recovery of business income.

    I’m still puzzled how any can believe that tax receipts is a relevant measure of the tax burden. To believe so is to deny that taxes have any effect on economic behavior and that tax incidence and tax shifting does not occur in response to changes in tax law. Rapid economic growth can often cause a surge in tax receipts but that does not equate with a high tax burden — quite often just the opposite.

  11. Mike Kimel says:

    Ryan F,

    “Would it not also be sort of theoretically thorough to estimate an average return to public infrastructure (easier said that done of course, but you could certainly put together a plausible range), and credit that back to the government under which such investments were made? That’d be hard but could be really informative and would mostly likely strengthen your case.”

    Its a good idea. However, I’m probably not going to be doing that for a while. I like to go where the data contradicts the theory I was taught in school and that causes enough problems. Given there’s so much low hanging fruit, I have a choice between spending time defending assumptions and making simple graphs. The latter allows me to cover more ground until I run out of low hanging fruit. (Wrt to infrastructure… there’s a lot of value simply in graphing the data since most people haven’t seen it yet and their assumptions are not entirely accurate.)

  12. Mike Kimel says:

    The Numeraire,

    “To claim the tax burden rose in 1933 is ridiculous. The NIPA tables demonstrate that the increase in tax recieipts stems entirely from an increase in excise tax receipts and an recovery in corporate tax receipts owing to the end of the economic decline.”

    I may be misunderstanding you, but it seems to me you are claiming that it is ridiculous to claim the tax burden rose because the tax burden rose in part for the reasons you provided. In this post I wasn’t differentiating between the reasons the total tax burden rose, merely whether it rose or not. And as I note in the post (and you agree in your comment), there was an increase in the federal government’s receipts as a share of GDP.

    Once again, I think you are focusing on income taxes. I am looking more broadly at everything that we are all paying. It doesn’t matter to me whether something is called a fee or if its called a tax if its coming out of my pocket.

  13. [...] the results must be some sort of anomaly. Perhaps the biggest offender is a graph which appeared in this post. The graph shows growth rates in real GDP per capita by Presidency, where each President is color [...]

  14. [...] Kimmel, “Presidents, the Tax Burden, and Economic Growth,” presimetrics.com, 13 June 2010 – Kimmel provides a dispassionate, data driven [...]

  15. Eschatology says:

    [...] under Bush Sr. too, which is to say, the magical thinking continued. Under Clinton, things changed (as noted in my book, tax revenues began rising and spending began falling in Clinton’s first year in office, thus [...]

  16. [...] figure 2 from this post. Tagged with: Canada • Francis Woolley • Policy [...]

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