by Mike KimelCross posted at the Presimetrics blog.To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent. Preposterous, right? Well, it turns out that’s what the data tells us, or would, if we had the ears to listen.This post will be a bit more complicated than my usual “let’s graph some data” approach, but not by much, and I think the added complexity will be worth it. So here’s what I’m going to do – I’m going to use a statistical tool called “regression analysis” to find the relationship between the growth in real GDP and the top marginal tax rate. If you’re familiar with regressions you can skip ahead a few paragraphs. Regression analysis (or “running regressions”) is a fairly straightforward and simple technique that is used on a daily basis by economists who work with data, not to mention people in many other professions from financiers to biologists. Because it is so simple and straightforward, a popular form of regression analysis (“ordinary least squares” or “OLS”) regression is even built into popular spreadsheets like Excel. I think the easiest way to explain OLS is with an example. Say that I have yearly data going back to 1952 for a very small town in Nebraska. That data includes number of votes received by each candidate in elections for the city council, number of people with jobs, and number of city employees convicted of graft. If I believed that the votes incumbents received rose with the number of people jobs and fell with political scandals, I could have OLS return an equation that looks like:Number of incumbent votes = B0 + B1*employed people + B2*employees convicted of graftB0, B1, and B2 are numbers, and OLS selects them in such a way as to minimize the sum of squared errors you get when you plug the data you have into the equation. Think of it this way – say the equation returned was this:Number of incumbent votes in any given year = 28 + 0.7*employed people - 20*employees convicted of graftThat equation tells us that the number of incumbent votes was equal to 28, regardless of how many people were employed or convicted of graft. (Bear in mind – that first term, the constant term as it is called, sometimes gives nonsensical results by itself and really is best thought of as “making the equation add up.”) The second term (0.7*employed people) tells us that every additional employed person generally adds 0.7 votes. The more people with jobs, the happier voters are, and thus the more likely to vote for the incumbent. Of course, not everyone with a job will be pleased enough to vote for the incumbent. Finally, the last term (- 20*employees convicted of graft) indicates that every time someone in the city government is convicted of graft, incumbents lose 20 votes in upcoming elections due to an increased perception that the city government is lawless.Now, these numbers: 28, 0.7, and -20 are made up in this example, but they wouldn’t have been arrived at randomly. Instead, remember that together they form an equation. The equation has a very special characteristic, but before I describe that characteristic, remember – this is statistics, and statistics is an attempt to find relationships based on data available. The data available for number of people employed and number convicted of graft – say for the year 1974 – can be plugged into the equation to produce an estimate of the number of votes. That estimate can then be compared to the actual number of votes, and the difference between the two is the model’s error. In fact, there’s an error associated with every single observation (in our example, there’s one observation per year) used to estimate the model. Errors can be positive or negative (the estimate can be higher than the actual or lower), or even zero in some cases.OLS regression picks values (the 28, 0.7, and -20 in our example) that minimize the sum of all the squared errors. That is, take the error produced each year, square it, and add it to the squared errors for all the other years. The errors are squared so that positive errors and negative errors don’t simply cancel each other out. (Remember, the LS in OLS are for “least squares” – the least squared errors.) You can think of OLS as adjusting each value up or down until it spots the combination that produces the lowest total sum of squared errors. That adjustment up and down is not what is happening, but it is a convenient intuition to have unless and until you are someone who works with statistical tools on a daily basis.Note that there are forms of regression that are different from OLS, but for the most part, they tend to produce very similar results. Additionally, there are all sorts of other statistical tools, and for the most part, for the sort of problem I described above, they also tend to produce similar outcomes.I gotta say, after I wrote the paragraphs above, I went looking for a nice, easy representation of the above. The best one I found is this this download of a power point presentation from a textbook by Studenmund. It’s a bit technical for someone whose only exposure to regressions is this post, but slides eight and thirteen might help clarify some of what I wrote above if it isn’t clear. (And having taught statistics for a few years, I can safely say if you’ve never seen this before, it isn’t clear.)OK. That was a lot of introduction, and I hope some of you are still with me, because now it is going to get really, really cool, plus it is guaranteed to piss off a lot of people. I’m going to use a regression to explain the growth in real GDP from one year to the next using the top marginal tax rate and the top marginal squared. (In other words, explaining the growth in real GDP from 1994 to 1995 using the top marginal rate in 1994 and the top marginal rate in 1994 squared, explaining the growth in real GDP from 1995 to 1996 using the marginal rate in 1995 and the top marginal rate in 1995 squared, etc.) If you aren’t all that familiar with regressions, you might be asking yourself: what’s with the “top marginal rate squared” term? The squared term allows us to capture acceleration or deceleration in the effect that marginal rates have on growth as marginal rates change. Without it, we are implicitly forcing an assumption that the effect of marginal rates on growth are constant, whether marginal rates are five percent or ninety-five percent, and nobody believes that.Using notation that is just a wee bit different than economists generally use but which guarantees no ambiguity and is easy to put up on a blog, we can write that as:% change in real GDP, t to t+1 = B0 + B1*tax rate, t + B2*tax rate squared, tTop marginal tax rates come from the IRS' Statistics of Income Historical Table 23, and are available going back to 1913. Real GDP can be obtained from the BEA's National Income and Product Accounts Table 1.1.6, and dates back to 1929. Thus, we have enough data to start our analysis in 1929. Plugging that into Excel and running a regression gives us the following output:Figure 1For the purposes of this post, I’m going to focus only on those pieces of output which I’ve color coded. The blue cells tell us that the equation returned by OLS is this:% Change in Real GDP, t to t+1 = -0.15 + 0.63*tax rate, t – 0.48* tax rate squared, tFrom an intuition point of view, the model tells us that at low tax rates, economic growth increases as tax rates increase. Presumably, in part because taxes allow the government to pay for services that enhance economic growth, and in part because raising tax rates, at least at some levels, actually generates more effort from the private sector. However, the benefits of increasing tax rates slow as tax rates rise, and eventually peak and decrease; tax rates that are too high might be accompanies by government waste and decreased private sector incentives.The green highlights tell us that each of the pieces of the equation are significant. That is to say, the probability that any of these variables does not have the stated effect on the growth in real GDP is very (very, very) close to zero. And to the inevitable comment that marginal tax rates aren’t the only thing affecting growth: that is correct. The adjusted R Square, highlighted in orange, provides us with an estimate of the amount of variation in the dependent variable (i.e., the growth rate in Real GDP) that can be explained by the model, here 17.6%. That is – the tax rate and tax rate squared, together (and leaving out everything else) explain about 17.6% of growth. Additional variables can explain a lot more, but we’ll discuss that later. Meanwhile, if we graph the relationship OLS gives us, it looks like this:Figure 2So… what this, er, (if I may be so immodest) “Kimel curve” shows is a peak – a point an optimal tax rate at which economic growth is maximized. And that optimal tax rate is about 67%. Does it pass the smell test? Well, clearly not if you watch Fox News, read the National Review, or otherwise stick to a story line come what may. But say you pay attention to data?Well, let’s start with the peak of the Kimel curve, which (in this version of the model) occurs at a tax rate of 67% and a growth rate of 5.85%. Is that reasonable? After all, a 5.85% increase in real GDP is fast. The last time economic growth was at least 5.85% was in the eighties (it happened twice, when the top rate was at 50%). Before that, you have to go back to the late ‘60s, when growth rates were at 70%. It isn’t unreasonable, then, to suggest that growth rates can be substantially faster than they are now at tax rates somewhere between 50% and 70%. (That isn’t to say there weren’t periods – the mid-to-late 70s, for instance, when tax rates were about 70% and growth was mediocre. But statistics is the art of extracting information from many data points, not one-offs.) What about low tax rates – the graph actually shows growth as being negative. Well… the lowest tax rates observed since growth data has been available have been 24% and 25% from 1929 to 1932… when growth rates were negative. What about the here and now? The top marginal tax rate now, and for the foreseeable future will be 35%; the model indicates that on average, at a 35% marginal tax rate, real GDP growth will be a mediocre 1.1% a year. Is that at all reasonable? Well, it turns out so far that we’ve observed a top marginal rate of 35% in the real worlds six times, and the average growth rate of real GDP during those years was about 1.4%. Better than the 1.1% the model would have anticipated, but pretty crummy nonetheless.So, the model tends to do OK on a ballpark basis, but its far from perfect – as noted earlier, it only explains about 17.6% of the change in the growth rate. But what if we improve the model to account for some factors other than tax rates. Does that change the results? Does it, dare I say it, Fox Newsify them? This post is starting to get very long, so I’m going to stick to improvements that lie easily at hand. Here’s a model that fits the data a bit better: Figure 3From this output, we can see that this version of the Kimel curve (I do like the sound of that!!) explains 36% of the variation in growth rate we observe, making it twice as explanatory as the previous one. The optimal top marginal tax rate, according to this version, is about 64%. As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will grow more slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut. However, keep the tax rates at the new “lower, tax cut level” and if that level is too far from the optimum it will really cost the economy a lot. Consider an analogy – steroids apparently help a lot of athletes perform better in the short run, but the cost in terms of the athlete’s health is tremendous. Finally, this particular version of the model indicates that on average, growth rates have been faster under Democratic administrations than under Republican administrations. (To pre-empt the usual complaint that comes up every time I point that out, insisting that Nixon was just like Clinton in your mind is not the point here. The point is that in every presidential election at least since 1920, the candidate most in favor of lower taxes, less regulation and generally more pro-business and less pro-social policy has been the Republican candidate.)Anyway, this post is starting to get way too lengthy, so I’ll write more on this topic in the next few posts. For instance, I’d like to focus on the post-WW2 period, and I’m going to see if I can search out some international data as well. But to recap – based on the simple models provided above, it seems that the optimal top marginal tax rate is somewhere around 30 percentage points greater than the current top marginal rate. The recent agreement to keep the top marginal rate where it is will cost us all through slower economic growth.---As always, if you want my spreadsheet, drop me a line. I'm at my name, with a period between the mike and my last name, all at gmail.com.---It occurs to me that I should probably explain why I used taxes at time t to explain growth from t to t+1, rather than using taxes at time t+1. (E.g., taxes in 1974 are used to explain growth from 1974 to 1975, and not to explain growth from 1973 to 1974.) Some might argue, after all, that that taxes affect growth that year, and not in the following year. There are several reasons I made the choice I did: 1. When changes to the tax code affecting a given year are made, they are typically made well after the start of the year they affect.2. Most people don't settle up on taxes owed in one year until the next year. (Taxes are due in April.)3. Causation - I wanted to make sure I did not set up a model explaining tax rates using growth rather than the other way around.4. It works better. For giggles, before I wrote this line, I checked. The fit is actually better, and the significance of the explanatory variables is a bit higher the way I did it.
67% hey? Garbage. Get a new computer, yours is not working.
Mike, so you are proposing that a total tax rate of ~78-80% is the optimum for growth. Oh, wait. 47% of the tax payers do not pay federal income taxes, so that rate only applies to the upper 53%. Moreover, to believe Mike's analysis, he asks us to blindly believe that marginal (federal) tax rates drive the economy.I won't re-cite the BEA reports i last referenced, but I will relate Mike's belief to what I study every day, Anthropogenic Global Warming and the CO2 causation. Even though history shows us there have been ups and downs in temps/economies (yes, that's plural) any correlations between CO2/marginal tax rates to temperatures/economic changes break down as we extend the time frame.You see, if we are to believe Kimel's curve as an economic causative/measure, it would have to hold up over time and environments. If we can find that/those correlation(s) then we could explain how and why Kimel's curve is true and not just coincidental to his pet theory.Nope! Still totally unconvinced. Even Ms CoRev wonders where such ideas come from. Her response: "Why would anyone work if the Govt is going to give them what is needed?"
CoRev--An Aside/OT remark here. Why are you interested in AGW/CO2 causation? NancyO
Rev--Why wouldn't you work anyhow? You may like to work--grow your own food that you could sell as well as eat. Or raise chickens for eggs. Or do carpentry...All sorts of stuff you could do at least for barter or sale. Why would you just sit there if you could occupy yourself otherwise?So, I answer a question with a question. What's the proof that high/low taxes in this country have any relationship to the economy at all? Very few people at the high end pay a larger percentage of their income to taxes than people in the middle. So, right off the bat, seems to me that higher income people haven't got a lot to complain about. Taxes aren't the deal. What people do with money besides spend/invest it in this country is the big deal. They have all they need from rents, they won't really work will they? Hmmmm? NancyO
I'll propose a reason why high marginal tax rates have cooincided with high growth periods: when there are high margnal rates the best use of surplus cash is to invest in the company itself, research, product and process improvements, et cetera. When marginal rates are low it makes more sense to simply take the money out of the company for use by the management and shreholders (in that order). What we have seen in the past decades is exactly what I posit: more-and-more cash is going to executive compensation and little to actual corporate development. Outsourcing is the quick-and-dirty method towards assuring that profits remain high so that executive compensation is to be continued. Where does the excess money go? Speculative investments -- anybody interested in some Tulip Bulbs?
"...<span>Oh, wait. 47% of the tax payers do not pay federal income taxes..."</span>Sheesh. First, you must consider that people support the economy not only by paying taxes but by being people - working, raising kids, buying stuff. Without human effort, the taxes are meaningless.Just being alive requires a minimum level of income or other resources, and pushing people below that level via taxation is not only cruel, but contra-indicated if you want a stable, prosperous country. The Line 2 personal federal deduction ranges from $5,700 to $11,400 depending on the sort of household -- hardly enough to live on.A useful overfiew is here. Leonhardt says, in part: "There is no question that the wealthy pay a higher overall tax rate than any other group. ... But there is also no question that their tax rates have fallen more than any other group’s over the last three decades. The only reason they are paying more taxes than in the past is that their pretax incomes have risen so rapidly — which hardly seems a great rationale for a further tax cut. "Noni
I guess I'm being panglossian here, but, what if there were no "Empire" to contend with on the U.S.A. side, the perks & loopholes that business enjoy, especially the what ever 500, no living off the credit card, none of those no bid cost + contracts, prohibiting of both government (comgress, staffers, etc.), Military officers, moving into private industry that supply the Government, strict adherance to laws & the regulation of same, royalties paid for minerals from public ownership, and I'm sure this is only scratching the surface, would that then justify the present tax rate?As I read the comments here & other sources, when ever anyone speaks of a higher tax rate for what ever reason, the howls of anguish reach highs that excede a "Tenor" in good voice. I also note that these same howls appear to come from the "Boomer" generation. But. are they not the ones who have gotten us in the mess were in today?
Two things.1) There's an easier way of explaining this Kimmel Curve. The period of high marginal tax rates is essentially 1940 is through to 1980 ish.That was also a period of high growth, absolutely correct. But there's a very good argument that that period of high growth came about precisely because, whil;e technology and productivity were roaring along in hte previous 20 years, there wasn't all that much economic growth about. So, we might ascribe the high growth to the previous high productivity growth without economic growth.In other words, while your regressions shows a correlation, the causation simply isn't there.2) In the economics of taxation it's always made very clear that long term effects are different from short term. So try lagging your growth by a decade or two against your tax rates, see what happens then.(Actually, that last is a little unfair, as I know exactly what will happen. The high tax rates of the 50s will explain the low growth rates of the 70s, the lower but still high rates of the 60s the pick up in growth in hte 80s....)
I appoligize for an error, not all "Boomers" are what I consider responsible for the mess were in, as there are plenty of good honest hard working people who really do care, but are usually drowned out by that other majority because they screem louder.
Mikei came to scoff. And stayed to pray.I think there is considerable danger that you... or some mythical future congress... would take your results too seriously and we would have some grim mirror image of trickle down, but for now i think it can only be healthy to present evidence that raising taxes is not going to put us back in the stone age. CoRev, of course, will refuse to work, but the rest of us know that even if the government provides everything we need, we will still manage to think of something else we want.i think George N Wells is agreeing with another Kimel theory. I don't know about Jed's correlation, but i suspect detailed analysis will show that he's not talking about the same thing Kimel is. Meanwhile top MARGINAL rates probably don't have to mean the same thing from one time to another. I could have a 90% top marginal rates on incomes over a hundred million, and that would not the same as a 90% top marginal rate on incomes over a hundred thousand.so let me fall back on the Coberly curve: pay the goddam bills. then pay for what you need or want. pretty much the economy will take care of itself. a tax is about the same a gravity or friction. a cost of doing business, not a reason to down tools and go on strike because it's "too much" in an economy where most people have more than they know what to do with.
but the social infrastructure that made us rich is crumbling because we are too damn greedy to change the oil.
normanbut in any case if you are going to have an Empire you are going to have to pay for it. and if the tax rates to pay for empire cause slower growth, well, that's the cost. what we have today is a congress that wants empire, but doesn't want to pay for it... except by forcing old people to work until they drop.
worstallcan't you tell when you are trying too hard. there are undoubtedly dangers associated with excessive taxation, but when you have to propose ten year lags you, and CoRev, are simply announcing that you can come up with any rationalization to deny any facts you don't like. as long as you can fool yourself and fool the people... who after all like lower taxes too... you will win the political argument. but watch as your own living conditions get worse, and your own "deficit spending" creates a debt you can't solve.
Dear tax the other people crowd:Will you donate to a charity that have an operating expense greater than 50 percent? Or simply pay someone over 50 percent salary and less than 50 percent real work?This game is played by the congress, state, county, municiple level. When is it acceptable when over 50 percent of the tax dollars goes to pay retiring baby boomers? Why do you think almost every state is near bankruptcy? Isn't that majority of taxes should be used to provide services.This is the same thing from wall street, let's pay ourself with other peoples money! Let pay AIG, bankrupt with other peoples money and let's get congress involved, let's pay with tax payees money.I think it's simply wrong and oppressive to ask people whom honestly work, contribute to have the majority of their working life paying government, taxes. Is it fair to ask someone to do it? Is this why we founded America? To pay higher taxes? The baby boomers have used up the savings from the generation that sacrifices themselves, now they want all the bells and whistles and screw their children.How about just tax at 100 percent? Problem solved?
CoRevit's hard to believe 47% of working age people have less money than I have... and I pay Federal Income Taxes. So I think your 47% must include retired people and babes in arms, school children and people sleeping under bridges. Or were you thinking of General Electric?
NanO said: "<span> What's the proof that high/low taxes in this country have any relationship to the economy at all?" If you remember the BEA references of last week, that is precisely what they said. </span>Dunno, that may be why I object to Mike's single variable analysis.
m. jed,I had forgotten about your post. I also don't have the pop data handy right now. But I think I know how we're getting different results, and I will be covering what I think causes the difference in our results. Something that didn't go into the post because it was getting too long - and which I plan to discuss in coming posts - is that the optimal tax rate with the naive model is a bit lower (I'm getting in the fifties for the naive model - just tax rates and tax rates squared) in the post WW2 era. The fit drops too.Now, your demographics seem like a good explanation, but they have two problems. I wasn't thinking demographics this weekend when I checked for structural breaks, and there is one that explains a lot... and which in turn cannot be explained by demographics. (Like I said, this is a topic for a later post.) But I want to focus on something that can be covered intuitively in a short comment: the difference between our respective data sets. The demographic variable might explain away why growth in the 1960s was so fast, if you're starting with the 1950s. It will not explain why growth was so fast from 1932 to 1940 and it would be one heck of a coincidence that both periods enjoyed that one big demographic bulge. Anyway, like I said, I will be spending a lot of time on this concept going forward.
Bruce,Sadly, the other computer I pulled up the file in this morning is also damaged the same way.
NanO, aren't you arguing against Mike's findings?
CoRev,BEA statistics begin in 1929. In that time, there have been three years in which real growth exceeded 15%. Minimum tax rate for those three years: 81%.There have been 5 years in which the real growth rate exceeded 10%. Minimum tax rate during those five years: 63%.There have been 11 years in which the real growth rate exceeded 8%. Minimum tax rate during those 11 years: 63%.There have been 17 years in which growth rates exceeded 6% a year. Minimum tax rate during those 17 years: 50%.There have been 36 years in which real growth exceeded 4% a year. Minimum tax rate during those 36 years: 38.5%. Perhaps you're starting to spot a pattern here?
George Well,I've stated that before, but never as elegantly.
Having been a CPA during the high marginal rate era, there is one problem that likely does not work its way into the model.During the high tax rate era large corporations (ATT, ITT, IBM, GM) dominated the economy and innovations, and entrepreneurs were suppressed.Why?Entrepreneurs are always short of cash, and when the business got momentum it ran into the high marginal tax rates. This tended to protect the big corporations from smaller innovative companies.The law of unintended consequences..............
NanO, I dunno for sure, but think because it predicts so many catastrophic events that we have little to NO HISTORY of ever happening. I have been skeptical of anthro-centric explanations of nature for many decades. For me it rings so untrue and egocentric, when we are little more than a pimple on nature's back side. I guess I just don't believe mankind is unnatural to this planet's "nature." Now, when we move to a totally different planet and we are unnatural. Finally, there are so many statistical exagerations being perpetrated in the name of AGW, that it is hard for any but a true believer (religious fervor level here) to actually believe in those exaggerations.AGW and Mike's single variable economics are similar in that they are simple solutions for a complex (economics) or chaotic (climate) problem.You even seem to dispute Mike's single variable explanation for economic growth, if you believe in AGW, then you are also in belief in a single variable driving an even more complex climate.
str,That's a pretty general statement that would be tough to support with any form of objective data. What innovations are you referring to that did not get developed in the past fifty years? Are you suggesting that all the modern communications technology, medical advances, transportation improvements, electronics, etc, etc, have all occured in the past ten years? That seems tough to believe. Progress has been steady, I would guess, inspite of the tax rates. It's spending and jobs that may change, but not innovation.
"<span>When is it acceptable when over 50 percent of the tax dollars goes to pay retiring baby boomers?" Pax Romana</span>Given all the discussion on this site over the past several years that statement stands out as representative of near total ignorance. Pax, give us all a break and do some homework before mouthing off with such bullshit.
tim worstall,Response to 2 first... I'll have to play with longer lags. Response to 1. Actually, the periods of high tax rates began in 1932 - tax rates were raised from 25% to 63%. Leaving out WW2, '32 to '40 also produced the fastest economic growth for the time period for which we have actual data. A simpler hypothesis... The fastest economic growth for the time period for which we had data occurred in WW2. That was the period of biggest increase in what one might call government interference in the economy. The second fastest was 1933 - 1940. That would be the the launch of the New Deal, the second biggest period of government interference in the economy. The third fastest was 1964 to 1968; that would be the launch of the Great Society, and by now I suspect you see where I'm going.
CoRevi'm with that. if the tax rate has no relationship to the economy, lets raise taxes to pay our bills, and the economy will do just fine, or not, for other reasons.
co revif you believe man is not affecting this planet, you don't get out enough.i am not much of a true believer type, except i did take high school chemistry seriously enough to remember a few facts routinely wished away by the climate deniers.
paxyou are living in a fantasy world. public employees work. ss retirees paid for their benefits. there are aspects of public spending i don't like myself. that's what elections are for. the problem is when the Big LIars have convinced the Big Fools that they can eliminate government entirely... or just the parts they don't understand... and that all that money will just come home to feather their particular nest.
Let me propose a new thing for you to look at (since I don't want to do the work myself :-)A combination of higher tax rates with higher poverty rates will increase growth. Growth comes when businesses invest, which comes when they perceive a need. If the government gives money to people who will spend it, demand rises and businesses invest.Over the past 75 years, the number of people in poverty has reduced. The multiplier for additional government spending has decreased. Periods of high growth have been less pronounced.Businesses are pretty bad at figuring out when to stop increasing investment. The real estate boom ended in a crash. The dot-com boom ended in a crash. But the Baby Boom kept getting extended, so dragging people out of poverty kept working for a long time. There are less people in poverty, less people with high multipliers, so optimal tax levels (with respect to increasing growth) are lower than they were 50 years ago.
Thank you.JaB (a retired boomer)
"anybody interested in some Tulip Bulbs?"Quoting a movie, and your expecting to be taken seriously? WOW!
It's the unfunded liabilities that are going to kill us....not infrastructure spending for example.Look at the states seperatley......they are sinking because of pensions.
If your including the years 1929 thru 1945, there is no way an honest analysis can reach an honest conclusion. Leave those years out! The economy was driven by different variables that today. We are a financial sector based economy right now....we have given away our power....apples and oranges!
Don't have enought time to work on this right now, but I will say in 1931, % of population aged 45-54 was 10.7%. In 1940 it was 11.8%. In 1992 it was 10.7%, in 2000 it was 13.5%. To be fair, in 2008 (the most recent in my file) it was 14.6%. The other interesting component is the change in "non-working" demographic of under 15 and 65+, which went from 34.5% in the 1931 to 31.8% in 1940; and from 34.6% to 33.8% 1992-2000 and to 32.9% in 2008Other demographic groups may have greater explanatory power, I chose this one, IIRC, because it's traditionally the highest earning cohort.
Mike your respnse is nonsensical. You just said of the 81 years since 1929, 72 of them had growth and tax rates exceeding 38.5%. But your argument is: "To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent." So, to interpret the marginal income tax rate should be ~ 58.5 to 71.5%. In the BEA numbers you cite, that occurred in less than 24% of the time. While the good growth, 4% or better, occurred in more than 88% of the time with a 100% correlation that there were marginal income taxes collected.So, you have taken one piece of data where taxes and economic growth were maximized, and shown a correlation of a totally different theory regarding their optimums. The data clearly show that maximum growth occurs/ed at 81%.So the pattern I am seeing is one of an economist locked into a simple theory to completely explain a complex system without the barest of understanding of causation.In the real world you are suggesting the solution to ressions is raising taxes, and to eleiminate recessions raise taxes to astronomically high rates. Isn't that the real world implementation of your findings?????
If @Pax is referring to SocSec. let me remind everyone that the highest SS payment is still at or just below the poverty line. Oh, and when the "hard working taxpayers" morphed into lazy entitled boomers, they had paid into SS for their whole working lives. SS, which they paid for up front, is now all that is keeping many from kicking their jobless kids out of the basement so they can live there themselves.Oh, and in looking at the comments, one factor seems to have dropped out of the discussion -- Mike is discussing the Top Marginal Rate, the rate people pay on all earnings <span>after</span> the first quarter million or so a year. They still have a good chunk of the quarter million to play with.
m.jedno doubt, but you are taking some unnecessary restrictions on the data which i suspect completely invalidates any general conclusion.disclaimer: i know nothing about econmics, and only a little bit about thinking straight. but i like Mike's conclusions because they at least show why we need to take the conventional wisdom a little less seriously. the conventional wisdom always turns out to be a rationalization for doing what people with money want to do. and that always turns out to be "less than optimal."but in fact, worrying about what is optimal is what i am arguing against here. we don't know what is optimal. never will. but we should be able to tell when what we are doing is hurting real people right now. and i don't mean by not giving them more money to spend at walmart.
Sticking with Oil has nothing to do with greed...It's common sense. Show me what to switch to without destroying the economy, and I'll bite!
"i did take high school chemistry seriously enough to remember a few facts routinely wished away by the climate deniers."Yeah...Like What?
sharkeywe are ALWAYS in a different economy. Mike is just looking at some variables to see what explanatory power they may have... if only to dispel the "explantory" power claimed by those who want to reach the opposite conclusion.for myself, i don't think that maximizing growth is even sane, let alone the criterion upon which policy should be based.
Dale, when hgave I ever said tha man is NOT affecting the planet? What I said above is that man's effect is natural. Just as natural as a volcano, hurricane, increase/decrease in solar radiation, etc. BTW, which of that list is most influential on climate? Hint: where does that ole heat come from?
paxthe model you are working with is the model of a dysfunctional family in which if sister sue gets the bigger piece of burfday cake, brother bob has to get the smaller.actually a country is more like an organism... if your left arm gets more food so does your right arm.the stronger each of us is, the stronger we will all be.the problem is that there are people smarter than you who go around telling you that the smartest thing for you to do is hulk in your cave and guard your bones from the other cave dwellers. and because those people are so sleek and fat you figure they must know something. then they go back to the valley where they live on milk and honey, and send you messages every year reminding you how important it is to stay in your own cave guarding your own bones and don't pay any attention to those communists who want you to learn to work together.
<span>"The fastest economic growth for the time period for which we had data occurred in WW2."</span>Making things then blowing them up doesn'tr meet my definition of either adding value or of economic growth. Sorry, but I simply don't trust wartime statistics on growth (any war, any country).<span>"The second fastest was 1933 - 1940."</span>That's rather my point actually. The immediately preceeeding four years were the largest contraction in a peacetime economy anywhere by anyone. Of Course there was going to be strong economic growth after that. Even dead cats bounce you know.64-68, sorry, don't know enough about the US economy to be able to comment.My argument is encapsulated here:http://www.marginalrevolution.com/marginalrevolution/2010/12/books-to-crave-a-great-leap-forward-1930s-depression-and-us-economic-growth.html"This thoughtful re-examination of the history of U.S. economic growth is built around a novel claim, that potential output grew dramatically across the Depression years (1929-1941) and that this advance provided the foundation for the economic and military success of the United States during the Second World War as well as for the golden age (1948-1973) that followed. Alexander J. Field takes a fresh look at growth data and concludes that, behind a backdrop of double-digit unemployment, the 1930s actually experienced very high rates of technological and organizational innovation, fueled by the maturing of a privately funded research and development system and the government-funded build-out of the country's surface road infrastructure. This substantive new volume in the Yale Series in Economic and Financial History invites renewed discussions on productivity growth over the last century and a half and on our current prospects."The simplest way of putting this is that the normal technological and productivity trends weer humming alonog from 1929 to 1941. But there was very little overall economic growth. Thus the post war long boom was really being driven by catch up .
sharkey, they are sinking because the people who got all the money won't pay taxes. those damn pensions were earned. that was part of the money they were paid for working... real work that benefitted you... they took that part in deferred compensation because they figured that was safer than taking it up front and playing games on the stock market.they figured the state would be good for it. little did they realize the state was made up of people who would turn out to be just like stupid and greedy bosses always turn out.
arnei tend not to agree. being soft here because i don't know. but if there is poverty at all, there is room for some kind of growth. we may not need the RATE of growth that we had in the past, but we need better directed growth.in any case the last "stimulus" was spent on rescuing rich people from their own folly, so it's hard to claim any reduction in the multiplier.
<span>"Why would anyone work if the Govt is going to give them what is needed?"</span>Ms. CoRev has uttered a non-sequitor. This post has to do with the impact of government taxation on growth rates, not on the nature or level of spending funded by those taxes.
Coberly,The pensions were typically negotiated by a union, they negiotiated more than what should have been negiotated for. Now the states are going to sink! Doesn't mean they don't deserve a pension, but look at California's situation, most of the pensions state workers and teachers are going to get are clearly undeserved. I happend to believe this was by design...Cloward and Piven Baby!
No, Rev. I don't think he is arguing for a causative relationship. People who advocate low tax rates or a flat tax say that their ideas would cause economic growth better than higher taxes. I think that what Mike is saying is that look at these years--no support for the high rate produces low growth theory. NancyO
Read Full Article »