Overall, higher taxes on the rich historically have correlated to higher economic growth for the country.
It seems self-evident that tax-cuts should stimulate the economy. It seems so self-evident, that we discuss the theory as if it were a known fact. We don’t even question the claim. But history offers us some evidence that tax cuts don’t stimulate the economy.
- In 1921 & 1925, major taxes cut were passed. In the following years a stock market bubble formed while working class wages stagnated, then in 1929 the bubble burst and the economy crashed into the Great Depression.
- In 1981 a tax cut was passed. The economy sank deeper into recession and stayed in recession for nearly two years.
- In 1987 major tax cuts were passed. By 1990 growth declined leading into the 1991 recession.
- In 2001 a tax cut was passed, and another rebate was given in 2008. From 2001 through 2008 the economy grew slower than it did in the preceding 8 while a bubble formed in stocks, housing, and executive salaries. In 2008 the bubble burst, and now the economy in sinking into the worst recession since the Great Depression.
So what do we see in the data overall? Perhaps we should look at the data more thoroughly. We start by looking at the marginal tax rate on the richest citizens.
When we look at the tax rate charged to the richest citizens, we see that low taxes correlate to slow growth. When marginal taxes on the rich were below 40% growth remained below 4.5%. When top taxes were above 65% growth tended to be higher, even going above 6%. Historically, higher taxes on the rich have correlated to higher growth.
Overall, higher taxes on the rich historically have correlated to higher economic growth for the country. It’s counterintuitive, but it is the historical fact. Just, to be certain, we can compare taxes to job creation also.
Again we see higher growth when the marginal tax on the rich is higher. It might seen odd, but that’s what history shows us.
Let’s look closer at how the economy changed after tax cuts. We can look at how both GDP and employment grew just before the tax cut, and then just after the tax cut. Did they grow faster or slower?
In the last 50 years there were 5 tax cuts to the rich. Three of them were followed by a decline in GDP growth, 3 were followed by a decline in employment growth. The evidence suggests that tax cuts do not promote growth and probably promote decline.
In the last 50 years there was just one tax increase to the rich. After that tax increase both the GDP and employment growth rates increased significantly.
The historical evidence suggests that an economic decline will follow a tax cut to the rich, and economic growth may follow a tax increase to the rich. The evidence suggests that the optimum tax marginal tax rate on the rich is higher than 60%.
Can we make similar conclusions for taxes rates on the middle class and poor?
For the lower classes, the historical data does not have an apparent pattern. The scatter is wide and fails to show a tendency in either direction.
Historically, taxes on the middle class and poor have shown no correlation to economic growth. Other factors must have greater influence than tax rates.
I was just talking about this not too long ago, it seems like taxing the very rich (and the companies they own) at a lower rate is an incentive to keep money concentrated at the top as opposed to actually letting profits “trickle down”.
Historical data seems to correlate with this.
America has become a country not ‘with justice for all,’ but rather with favoritism for the rich and justice for those who can afford it — so evident in the foreclosure crisis, in which the big banks believed that they were too big not only to fail, but also to be held accountable.
This is an amazing article by Joseph E. Stiglitz, a Nobel laureate in economics
America likes to think of itself as a land of opportunity, and others view it in much the same light. But, while we can all think of examples of Americans who rose to the top on their own, what really matters are the statistics: to what extent do an individual’s life chances depend on the income and education of his or her parents?
Nowadays, these numbers show that the American dream is a myth. There is less equality of opportunity in the United States today than there is in Europe – or, indeed, in any advanced industrial country for which there are data.
This is one of the reasons that America has the highest level of inequality of any of the advanced countries – and its gap with the rest has been widening. In the “recovery” of 2009-2010, the top 1% of US income earners captured 93% of the income growth. Other inequality indicators – like wealth, health, and life expectancy – are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.
It would be one thing if the high incomes of those at the top were the result of greater contributions to society, but the Great Recession showed otherwise: even bankers who had led the global economy, as well as their own firms, to the brink of ruin, received outsize bonuses.
A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained their wealth by exercising monopoly power; others are CEOs who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from government munificence – either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights).
Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. Those at the top, in such cases, are enriched at the direct expense of those at the bottom.
It might not be so bad if there were even a grain of truth to trickle-down economics – the quaint notion that everyone benefits from enriching those at the top. But most Americans today are worse off – with lower real (inflation-adjusted) incomes – than they were in 1997, a decade and a half ago. All of the benefits of growth have gone to the top.
So, the government cuts spending, then what?
For example. When I lost my job and had to take one making less, my household budget got smaller. I cut out unnecessary spending, one of the first things I stopped doing was going to the car wash.
I used to go to the car wash at least twice a month, then all at once I stopped. I bring this up because I’ve noticed as the economy was getting worse, several car washes around where I lived went out of business.
There were a lot of other people, just like me who were cutting back on their household expenses, and luxuries like going to a fancy car wash are one of the first things to go.
Now, less people were coming to the car wash and they weren’t making enough money to pay their employees and keep up with business expenses. They close, there’s two or three more people out of work. This doesn’t just affect the employees at the car wash, it affects the owner, then affects any businesses the employees or owner might patronize, as they are now in a worse financial situation too.
This happens enough times and there is a chain reaction right up the economic line, all the way up to there being one less business (or in the case of my neighborhood, three less businesses) the city is receiving tax revenue from, everyone loses over all.
What needs to happen is people who are going to go to the car wash every few weeks need to have the money to be able to do it. The car wash employees then have a job, they have money to spend, the owner is bringing in money that they will also being put back into the economy, people start spending again and business thrives all around.
I’m all for cutting unnecessary spending in government. There’s a lot of redundancy that could be cut out, but that’s for another discussion.
Once you get the money flowing again, you are collecting more taxes on more people working, more taxes on businesses who are now in better shape and bringing in more taxable revenue, then you start paying down debt while (optimally) streamlining government spending that may not be unnecessary any more now that money is flowing in again.
Paul Krugman: it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us
Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking, not growing. It’s not an official recession yet, but the only real question is how deep the downturn will be.
This downturn is hitting nations that have never recovered from the last recession. For all America’s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe’s has not. And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain’s slump has now gone on longer than its slump in the 1930s.
Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster.