
Tax Cuts Don't Lead to Economic Growth, a New 65-Year Study Finds  - aarghh
http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/
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curt
Please know that in periods of "high personal tax rates" business owners
declared their income through their companies thereby lowering their tax
rates. You would have a company car, company vacation, company dinners, you
can even make it company policy to pay for the employees children college
education, etc... This is the same reason any comparison of income equality
over time is meaningless. Since income was declared through different avenues.

To understand the tax implications of economic growth you have to look at the
tax payments as a percentage of GDP as well as compliance costs. In the US tax
payments have held steady at about 18% of GDP since WWII until recently.
People hunt for loopholes no matter what. But when rates are low you don't
have to look for loopholes, so you can deploy your capital more efficiently.
Thus generating economic growth. This is why tax cuts often stimulate large
economic booms. Capital that was sitting in say tax-protected muni bonds will
move into the market and be deployed for business expansion and thereby
hiring.

There's so much evidence to the contrary of this article, even Obama's own
counsel of economic advisories share the view that tax cuts stimulate economic
growth. Christina Romer, his former advisor wrote a paper on the subject. What
they do is look at country around the world to collect more data points for a
better regression analysis.

Also note that when you say "tax cuts", not all tax cuts are made equal. For a
tax cut to be effective it needs to change long-term behavior. So credits and
such have a near zero or negative effect while rate cuts have a positive
effect. The most beneficial being capital gain rate cuts (ie every time they
have been cut, revenues from the tax have increased), corporate, and then
final income tax rate cuts.

-Really going to down vote me without refuting any of what I said.

~~~
btilly
That is a strong set of claims, and as long as you hold it, you are utterly to
any set of facts that might dispute it.

According to IRS figures, the top 400 tax payers today pay income taxes below
16%. According to the best available figures, the top theoretical tax rate
during the 1950s was over 90%, but the average tax rate paid by the top
approximately 400 people was 51.2%. Obviously they used a lot of tax
loopholes. Obviously they still wound up paying, in real taxes, a lot more
than the very rich to today.

Of course if you refuse to believe that the real figures were reported to the
IRS, you can believe any figures that you want. But it is pretty hard to
reasonably come to the conclusion that the rich today are paying similar tax
rates to the rich 55 years ago.

As for taxes and economic growth, it is a trivial piece of economics to
conclude that collecting more in taxes immediately takes money away from the
economy. However it is only slightly less trivial to conclude that the amount
of damage it does is proportional to how likely that money was to get spent.
Given that the poor are likely to spent more than the rich, that means that we
should prefer to tax the rich more.

 _Therefore_ if you're going to levy taxes (and there is no reasonable way to
avoid the need to), it is more efficient for all of us to tax the rich more
heavily. Instead of taxing them less, which is what they keep telling us we
need to do.

(I, along with many of the people on this site, pay a greater fraction of my
income in taxes than Mitt Romney does. But is this really good public policy?)

~~~
curt
>the top 400 tax payers today pay income taxes below 16%. According to the
best available figures, the top theoretical tax rate during the 1950s was over
90%, but the average tax rate paid by the top approximately 400 people was
51.2%.

Big problem... You're comparing two completely different things. The 16%
number is based on the fact that most of the wealth earn their income through
capital gains which is taxed at a lower rate. So you're comparing income taxes
to capital gains taxes. Two completely different items, apple to oranges.

> But it is pretty hard to reasonably come to the conclusion that the rich
> today are paying similar tax rates to the rich 55 years ago.

You're second point is also wrong. The rich actually pay a higher percentage
of the tax burden when rates are cut. Look at the 20's. Taxes were slashed and
the percentage of the income taxes paid by the rich doubled. Same today
happened with the Bush cuts. The top 10% pay 71% of income taxes, and top 1%
around 40%. Here's a chart to show you:
[http://www.heritage.org/federalbudget/top10-percent-
income-e...](http://www.heritage.org/federalbudget/top10-percent-income-
earners)

How much more exactly should the rich pay?

As for capital gains. You don't want to raise it, unless you're out to punish
the rich, since when it's lowered it generates more revenue. When it's
increase, it generates less.

~~~
dasil003
> _How much more exactly should the rich pay?_

This is an idealogical framing of the conversation. The opposing idealogical
framing is:

How much greater economic inequality can society tolerate?

~~~
nirvana
One day, your side will realize that it is your attempts to "fight economic
inequality" that have resulted in the economic inequality you rail against.

It is this lack of understanding of economics that makes it easy to manipulate
you come election time.

And the more your policies destroy people's lives the more you demand even
more centralized control.

~~~
leot
Yes, an entire "side" profoundly misunderstands basic economic principles.

Which side was it, do tell, that created faux think tanks in the 70s to
espouse a particular economic philosophy? These would be the same think tanks
that seem to simultaneously advocate for the "marketplace of ideas" and then
shun their members when they show a lack of ideological purity.

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lutusp
This is absurd. The tax increases may well have been in _response_ to
favorable economic conditions, in other words, _an effect, not a cause_.

I'm certainly not saying that's the only explanation, only that we don't know.
But the article argues that the cause -- tax increases -- produced the effect
-- economic growth. It is equally likely that the relationship is reversed.

This is what prevents economics from being a science, and why widespread
science illiteracy makes us all fools.

~~~
Roboprog
Let's try this then:

Assertion: "high" (greater than 50%?) marginal tax rates make economic growth
impossible.

Evidence: Top tax rates between 1940 and 1980 were between 70 and 90%. Growth
was higher than it was after 1980.

Conclusion: the assertion about the harmful effects of a high top/marginal tax
rate is false. (I think this process is called "induction").

Note that this does not prove that high tax rates are beneficial, only that
they are not harmful.

It's certainly possible that the general slowdown since 1980 is due to other
factors, such as growing scarcity of cheap energy and other materials. But
investigating alternatives will screw with the livelihood of somebody in the
top 0.01% income earners, so one might argue it's harmful to your health to
push too hard for such :-)

~~~
Roboprog
Note that I am NOT arguing for a linear relationship in any way, shape or
form. Clearly, a tax rate that approaches 100% prevents any activity from
taking place in the open.

Also, one could argue that a property tax would be better than an income tax
as a way to enforce maintenance of the commons and to provide infrastructure
and an educated work-force. (I tend to favor use of taxes as "investment",
rather than "money for nothing")

~~~
nirvana
You're knocking down a strawman. The position is that higher tax rates reduce
economic growth. Your evidence does not contradict that assertion. Doesn't
even touch it. Further, you're dealing with claims and a study that are
ideologically driven... so more precision is required, not less.

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Aloisius
I am shocked, absolutely shocked that the vast majority of economists have
been right for decades. Next thing you'll tell me is that limited quantitative
easing or government spending increases employment!

~~~
nirvana
I'm not at all surprised that people brought up on political propaganda think
that this propaganda represents the opinion of the "vast majority of
economists".

The reality is, anyone who knows anything about economics knows that taxes
inhibit economic growth.

The idea that this is wrong, is so absurd that it should be laughed at....
only the problem is, most americans are absolutely ignorant of economics and
thus can be tricked into believing it. Or in your case, assuming that "the
vast majority of economists" think this, and have done so "for decades".

Frankly, it is astounding how much you have rejected economic as a science
while thinking the partisan ideology you're pitching is "economics".

~~~
seanmcdirmid
Any economist worth their salt knows that taxes may or may not inhibit
economic growth. Taxes invested in infrastructure, security, and education may
actually increase growth long term. Taxes wasted on corruption will most
definitely hurt growth. Property taxes also encourage people to put properties
to work, inheritance taxes encourage more dynamism between the generations
(discourage old money aristocracy), and so on. Overly harsh taxes on the rich
will also encourage avoidance (honest or dishonesty) and migration (negotiate
your own rate with a swiss canton), while regressive taxes on the poor will
lead to riots and revolts.

Societies are complex systems and managing them efficiently is actually (gasp)
quite difficult.

~~~
dschobel
_Societies are complex systems and managing them efficiently is actually
(gasp) quite difficult._

This is _precisely_ the core tenet of conservative fiscal policy. The idea of
coordinating any economy of non-trivial size from a central position is a
fool's errand and invariably puts drag on the economy.

~~~
seanmcdirmid
The USA is hardly a very centralized system; a lot of taxation happens at the
state and local levels, while spending as a share of GDP isn't crazy compared
to other developed countries (who mostly consider us very conservative). From
some cruddy numbers I found via a quick Google; if someone has better numbers,
please share, Federal government spends 25% of our GDP, state/local another
15%, we spend 60%. Of course, we spend money we haven't earned (lent from
other countries), so say the federal government taxes at about 15% of the
economy (states/locals don't go into debt as much, so they are probably
roughly event at 15%). T

Sources:

[http://www.usgovernmentspending.com/us_20th_century_chart.ht...](http://www.usgovernmentspending.com/us_20th_century_chart.html)
[http://www.politifact.com/virginia/statements/2011/apr/22/ma...](http://www.politifact.com/virginia/statements/2011/apr/22/mark-
warner/mark-warner-says-federal-spending-near-all-time-hi/)

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mcenedella
This article well illuminates the dictum to beware analysts picking their own
time horizons. Calculating impact from five-year growth rates is problematic
for business cycle, responsiveness, and exogenous factors.

Cato's reply is here: [http://www.cato-at-liberty.org/tax-rates-impact-
economic-per...](http://www.cato-at-liberty.org/tax-rates-impact-economic-
performance-but-other-policies-also-matter/)

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seagreen
Just a reminder that since there's actual power at stake here (votes) it takes
extra work to write a quality comment on this kind of article. The difficulty
is equivalent to trying to have a discussion where some unknown but real
amount of money will go to the political party whose policies are closest to
those advocated in the top rated comments. This makes it genuinely hard to
think clearly on this kind of topic.

Because of this it's extra important to be non-partisan, which is hard. Try it
though, it's a fun exercise!

My comments: I strongly agree with one of the conclusions of the article, that
we should be "humble about taxes as a tool for growing the economy." However,
I'm suspicious about their reasoning. I'm not a statistician, but doesn't a
sample size of one seem a little . . . low to anyone else? It seems fairly
likely to me that if you examined more situations, you would find that taxes
are generally not a tool for growing the economy, are sometimes beneficial,
and are sometimes strongly detrimental.

For instance, say you're running a city-state in East Asia. Given that you're
competing against Hong Kong and Singapore, I'd guess that low taxes would be
essential to economic growth. On the other hand, say you find yourself in
charge of Somalia now, or Poland in 1938. I don't know about you, but
personally I'd really be digging the infrastructure/tanks respectively.

This makes me pessimistic that accurate conclusions can be drawn from a study
like this. For instance, say you're rich in 1960s America but you don't like
the high taxes. Where else would you _go_? Now there are lots more options.

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mhartl
Happy to hear it. I think it's time to try a 100% tax rate and see how that
goes.

~~~
ekianjo
Agree. Let's ban profits altogether, punish companies daring to fire people by
putting their CEOs in jail and then nationalize their assets, redistribute all
money around all classes of societies to remove once and for all the
inequalities of life, providing government jobs for everyone and we will be
closer to a real paradise on Earth.

Oh wait. Russia tried that. For more than 65 years. It did not work too well
for them.

~~~
rayiner
> Oh wait. Russia tried that. For more than 65 years. It did not work too well
> for them.

You might want to learn a little bit of history before spouting off the
conventional wisdom you learned in 8th grade.

Russia for hundreds of years was a total backwater. At the turn of the 20th
century it was incredibly far behind the rest of Europe. Under communism
Russia became an industrialized superpower that rivaled the US. Ultimately the
communist system collapsed, but partially because of its own success. The
impoverished denizens of pre-Communist Russia had never been able to force
democratic reform, but with the economic growth under communism arose a
commercial class that was able to force some level of democratic reform.

~~~
ekianjo
It is conventional wisdom because it goes against all human instincts that the
fruit of your work should your own property. That is why all communist systems
ultimately fail, because they kill all incentive to work hard and to innovate
since no single individual can get the benefits of their own work.

Let me laugh at your "superpower" claim regarding Russia. For dozens of year
that "superpower" had to rely on importing wheat from the US to keep feeding
its own population. Being able to launch rockets while your people are
literally starving (and I am not talking about being "hungry" as we see often
nowadays) is not an achievement, it is an utter failure.

There was no economic growth under communist Russia: it was simply spoliation
of people's property to feed certain sectors of the industry (the ones that
were "successful". Like Bastiat said, there are "things that you see and
things that you do not see". Focusing only on the achievements of Russia makes
it easy to forget the massive failure of its system in all other endeavours.

~~~
ippisl
>> they kill all incentive to work hard and to innovate

At that time, the USSR was pretty advanced technologically. And it's citizens
we're and still are pretty advanced academically.

One explanation why the soviet system failed was due to inefficiency in
investing in oil production(which led to a mini soviet peak oil), because the
wrong incentives at the institutional level.

But wrong incentives at the institutional levels are pretty common in
capitalistic countries: the 2008 crisis is one example.

~~~
ekianjo
I am not talking about government-sponsored innovation (all countries with
enough cash are capable of doing that), I was referring to spontaneous
innovation (people setting up businesses by themselves to create new
products/services and add value to society). Obviously when you are in a fully
state-controlled economy, none of that stuff can be allowed to happen.

------
udpheaders
Next week: Economic Growth Doesn't Lead to ________, a New 65-Year Study Finds

Fill in the blank.

Do people want "economic growth" or whatever that might be assumed to lead to,
or do they just not want to donate money to their country through their
government?

One is kind of indirect and speculative, the other is direct and immediate.

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jacques_chester
The headline is needlessly inflammatory.

A better headline might be "tax rates and growth only poorly correlated in one
particular country in a limited period with the highest rate of technological
change in recorded history".

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ArmstrongRSBC
We are running a massive balance. We have a tremendous national debt.

Our economic growth hasn't been paid for yet.

~~~
EricDeb
Agreed. Lets cut defense and military spending substantially.

~~~
mpyne
Yes, because summarily removing all of that spending would certainly have no
drastic follow-on effects to the national economy.

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zeroonetwothree
The number of significantly different tax policies over those 65 years is very
small--less than a dozen. So concluding anything from such a small number of
samples is impossible. Thus it's not surprising they find "no correlation"
between taxes and economic growth.

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joshuaheard
I've been looking for reasons to retire, and if the tax rate were 90%, I'd be
out.

~~~
Gustomaximus
Do you understand marginal tax rates? Hypothetically if tax rates did move to
90% on personal income this would most likely be triggered on such a high tier
of income you would already be working because you want to, and not for
financial need. Also once you average out the tiers leading to 90% you will
pay a lot less than this 90% you're throwing out there.

Edit: spelling

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onetwothreefour
LOL. No shit.

No one actually thinks this. It's called pandering to the base.

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nnnnni
It took a 65-year study to prove something that should be obvious to anyone
with a little bit of common sense?

