Debunking the GOP myth that lower taxes leads to economic growth

Posted by AzBlueMeanie:

We all know that the faith based supply-side "trickle down" GOP economics theory is the greatest fraud ever perpetrated. There is absolutely no empirical evidence to support it — hence the "faith based." But a lot of people working for billionaire-funded conservative think tanks make a lot of money perpetrating this fraud, and they have a vested financial interest in its continuation. It is an entire cottage industry.

So we have to constantly remind people that it is a fraud. CHART: Since 1950, Lower Top Tax Rates Have Coincided With Weaker Economic Growth | ThinkProgress:

Michael Linden, Director of Tax and Budget Policy at the Center for American Progress, found “growth was actually fastest in years with relatively high top marginal tax rates”:

Back in the 1950s, when the top marginal tax rate was more than 90 percent, real annual growth averaged more than 4 percent. During the last eight years, when the top marginal rate was just 35 percent, real growth was less than half that. Altogether, in years when the top marginal rate was lower than 39.6 percent — the top rate during the 1990s — annual real growth averaged 2.1 percent. In years when the rate was 39.6 percent or higher, real growth averaged 3.8 percent. The pattern is the same regardless of threshold. Take 50 percent, for example. Growth in years when the tax rate was less than 50 percent averaged 2.7 percent. In years with tax rates at or more than 50 percent, growth was 3.7 percent.

As Linden put it, “these numbers do not mean that higher rates necessarily lead to higher growth. But the central tenet of modern conservative economics is that a lower top marginal tax rate will result in more growth, and these numbers do show conclusively that history has not been kind to that theory.” Indeed, these numbers put the lie to the common Republican refrain that Obama and Democrats in Congress are trying to implement a “job-killing tax hike” by putting the top tax rate back to where it was under President Clinton.

UPDATE: Paul Krugman makes a similar point about the myth that cutting taxes increases government revenues in Reagan and Revenues – NYTimes.com:

The wholesale voodization of the GOP is a sight to behold; apparently the nonsense about the Reagan tax cuts having led to a vast rise in revenue is now something one must claim to believe. Anyway, a quick note about Federal revenue history.

The way I like to look at it is to compare business cycle peaks. We know that recessions reduce revenue and recoveries raise it. So it’s much more informative to look at peaks (not troughs: all happy economies are more or less alike, each unhappy economy is unhappy in its own way). Oh, and since 1979-82 was really one double-dip recession, I just use 1979 and ignore the 80-81 “recovery”.

So here’s the rate of growth of real per capita federal revenues between successive business cycle peaks:

There was no Reagan revenue miracle; growth slowed. There was a Clinton miracle. And there was a Bush II reverse miracle.