Does Raising The Marginal Tax Rate on the Rich Change the Behavior of the Rich?
Does Raising The Marginal Tax Rate on the Rich Change the Behavior of the Rich? The answer isn’t as obvious as you may think…especially in economic circles. There is an interesting debate going on in the economics blogosphere in regards to the optimal taxation rate.
Robert Frank, from the New York Times recently wrote…
Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. In their familiar rhetorical flourish, they insist that a more progressive tax system would kill the geese that lay the golden eggs. On close examination, however, this claim is supported neither by economic theory nor by empirical evidence.
Dr. Mankiw, who wrote two of my textbooks while in college and still looks younger then I do, responded…
[Robert] is perfectly free to believe whatever he likes and to advocate increasing the top marginal tax rate. But to suggest that there is neither theory nor evidence to support the beneficial effects of lower marginal tax rates on high-income taxpayers indicates a lack of appreciation of the academic literature in public finance.
If you are interested in this type of theory you should read the entire post here and the follow-up found here. Definately a good read.
on April 13th, 2007 at 11:18 pm
Interesting, but what I’d like to know is what the growth rate of the US economy has been in the past, oh, 30 or so years, compared to the 30-40 years before.
If I understand my US tax history correctly, the top tax rates were way higher (double?) in the earlier period, but the US still expanded quite nicely.
If the economy grew at similar rates in both periods, then I’m tempted to say “pshaw” to Mankiw’s explanations.
If however, the cuts to the top rates opened the gates and made the economy explode, perhaps he’s on to something.
Why is something so straightforward not cited in the posts?
on April 14th, 2007 at 10:31 am
Click on chart to make it bigger.
The chart above is the highest marginal tax rate in a year plotted against the growth in GDP from 1929 to 2003. The red line is the trendline and shows that higher marginal tax rates are correlated with lower growth rates. There are many problems with this quick and dirty analysis (increases in tax rates change attitudes and investments over many years…not just the year the rate changes, the portability of money to and from other countries based on thier marginal tax rates, the way the government spends the money it taxes, long-run vs. short-run, etc.), however, the main point is generally accepted. If you raise the marginal tax rate on the capital creating wealthy then GDP will be effected negatively. People spend their entire academic career explaining this…and I will not be able to come close to fully explaining it in this comment.
If you are an economics info junkie this debate is old hat and many of the assumptions are not stated because most of the people in the debate are familiar with the terms of the debate. The reason that what you ask is not quoted in the article is because the analysis is infinitely more complex then a simple comparison of growth to tax rates. According to the calculations in my quick comparison the top marginal tax rate ex[plains 13% of the change in GDP…not much…but still nothing to sneeze at. But as Mankiw wrote here…
on September 17th, 2007 at 11:15 pm
What is going on with your chart. What are the units on the Y-axis? I have no clue what your units are ranging from -200 to over 400. It is not annual percent growth. The three best growth years came when the top rate was 81% or 88% during W.W.II. This chart implies the best growth was during the Clinton Administration when the top rate was 39.6%. After W.W.II the best growth year was1936 when the top rate was 79%, then 1934 with a top rate of 63% followed by 1950 and 1951when the top rate was 91%. If you plotted straight forward annual growth against the tax marginal persona income tax rate your line best fit line would be slightly positive rather than negative. What transformation did you do to the data?
on October 18th, 2008 at 11:37 pm
As a non-economist, I’m curious about this: how accurately do GNP or GDP reflect real economic quality of life for actual Americans from the middle-income brackets and downward?
In other words, what does the following statement actually mean?
“In today’s economy, such a GNP expansion would mean an extra $90 billion a year that the nation can spend on consumer goods to raise living standards, or capital goods to maintain prosperity.”
Who is “the nation”? Exactly who has how much of this “$90 billion” to spend?