Tax Rates and GDP Growth

Let’s see whether we can prove that higher taxes are bad for the economy by charting the top marginal tax rate versus the % growth in GDP for each year. If higher taxes stifle the economy, we should see an increase in growth each time we lower tax rates. And likewise, if the theory holds, we’ll see a drop in growth each time we increase the tax rate. Does that pan out?

Overall, the past 80 years show us a thorough lack of clear correlation between the top marginal tax rate and GDP growth. The data’s closest hint of a relationship derives from the slightly more robust average GDP growth back when the top rates were higher, but that closest hint isn’t close enough to be sure of an ideal rate. The notion that lowering the top tax rates improves the economy just doesn’t hold water. Indeed, these 8 most recent decades show us that increasing the top tax would not necessarily have any impact on the economy, let alone slow it at all.

Update 02/03/2011: see Chained to Real: Tax Rates, Inflation-adjusted GDP Measures, and the Difference for a version of the above chart using another inflation-adjusted measure of real GDP growth (with roughly the same result).

Update 02/07/2011: Replaced original chart with improved version featuring better parity of scales, better visibility of trendlines, and replacement of the poly trend with a linear. The change in scale does suggest an interesting¬†symmetry in the past two or three decades. We’ll look at that in more detail later.

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