Myth: Tax cuts spur economic growth.

[Quixote1818]

Myth: Tax cuts spur economic growth.

Fact: High tax rates are correlated with economic growth.

Summary

There is no historical evidence that tax cuts spur economic growth. The highest period of growth in U.S. history (1933-1973) also saw its highest tax rates on the rich: 70 to 91 percent. During this period, the general tax rate climbed as well, but it reached a plateau in 1969, and growth slowed down five years later. Almost all rich nations have higher general taxes than the U.S., and they are growing faster as well.

Snip>

A review of American history makes the opposite case that conservatives would like it to make: high growth usually coincides with high taxes. During both world wars, taxes soared to record heights. And the supercharged economies that resulted produced high growth for decades afterwards. World War I was followed by the Roaring 20s; World War II was followed by the boom times of the 50s and 60s. The reason why wars are good for the economy is a matter of controversy -- one likely theory is that war compels government to invest heavily in manufacturing. Whatever the reason, the point is that these economic boosts occur during a period of unusually high taxation. Hate taxes though they may, people resort to them when their survival is on the line.


The following chart shows economic decline and growth during the Great Depression:

Year %Change in GNP President
----------------------------------
1930 - 9.4% Hoover
1931 - 8.5 Hoover
1932 -13.4 Hoover
1933 - 2.1 Hoover/Roosevelt
1934 + 7.7 Roosevelt
1935 + 8.1 Roosevelt
1936 +14.1 Roosevelt
1937 + 5.0 Roosevelt
1938 - 4.5 Roosevelt Note: In 1938 Roosevelt cut spending to get control of the debt and the economy retracted.
1939 + 7.9 Roosevelt
As you can see, the Depression worsened under Hoover's watch, and recovered during Roosevelt's. By the beginning of Hoover's presidency, the bottom 80 percent of all American income-earners were off the tax rolls entirely, and the rich were taxed at a record low 25 percent. By the end of 1932 this top rate was raised to 63 percent, and by 1936 it was 79 percent. Roosevelt instituted a vast new array of taxes, including corporate taxes, inheritance taxes, dividend taxes, gift taxes and excise taxes. And he raised them at a faster rate than any president in U.S. history:

See whole thing here: http://www.huppi.com/kangaroo/L-taxgrowth.htm

[mrcheerful]

1. Oh come on now, ask any wing nut, Hoover was on the right track and FDR

got a break because of "his" war with Japan and Germany. Of course you have to ignore the years in between 1930 and 1942, but hey cherry picking is the wing nuts best defense to ensure they believe crazy things and able to repeat it without having to look any farther then the latest talking point.

[Zoeisright]

2. Not only that, but wars do NOT make the economy better.

That's another repuke lie from World War II.

[Alias Dictus Tyrant]

6. Yeah, that is an idiotic one

That is Bastiat's Broken Window fallacy writ large.

It is ironic because it is a well known failure of Keynesian economics, which many Republicans consider to be rubbish generally. So they select a gross defect in something they view as "left-wing" economics, and then champion it as their own to push the war machine. FAIL.

Apparently they do not find the cognitive dissonance to be debilitating.

[Greyhound]

3. K&R. A myth that needs to be exposed. n/t

[Alias Dictus Tyrant]

4. Caveat: only true for some taxes

Most economics wonks will tell you that income taxes have a relatively small impact on economic growth relative to some other taxes. Taxes are generally a loss to the economy, but some taxes create much bigger losses per dollar of revenue raised than others.

The Republicans screw this one up all the time, the reality is more nuanced. For a given level of revenue to the government, you can increase total economic growth simply by shifting the taxes around to a structure that creates a smaller economic loss in aggregate. For example, if you lower capital gains taxes and increase income taxes in a revenue neutral way, the economy grows because capital gains have a much higher (~3x is a common rule of thumb) adverse impact on the economy than income taxes.


So yes, the high income taxes in the mid-20th century did not significantly impact the growth of the economy until the early 1970s. The part that Democrats will not like to hear is that taxes on capital were consistently cut several times over that same period, so it was really just a shift to a more efficient tax structure. In the early 1970s (and a bit later in that decade) they tried something different: raising taxes on capital. It turned out badly. This is why most socialist countries have high taxes on income and very low taxes on capital. Maximize revenue *and* economic output.

Capital tax structures like we have today in the US did not even exist until circa 1978 (IIRC) when they completely rewrote the tax code. The previous capital taxes used a somewhat more convoluted system, so what we have now is basically an improvement. The tax cuts prior to the 1970s are not apples to apples with current capital gains tax structures.

Something many people do not know is that capital gains taxes can be deferred indefinitely (among other tax advantages) if you keep reinvesting the money in small-ish businesses, a good thing as it drives a lot of the venture capital and small business investment. If it was not for that deferral the US would attract much less tech venture investment. It directly pays for several million jobs in the US. In fact, much of the "lost" capital tax revenue is immediately recovered as income tax revenue, and that does not even count the long-term tax base created by the economic expansion.



Obama is talking about eliminating capital taxes on small business which is good because it will drive capital, including foreign capital, into good jobs. On the other hand, Dodd is talking about instituting financial regulations that would have a side effect of regulating away most venture capital investments, so it may be moot. Hopefully sanity prevails so that we can get the economy back on track.

[damyank913]

5. Taxation does not spur growth...

Well thought out deficit spending does spur growth. I have no problems paying taxes (well maybe a little) but not for bridges to nowhere. I believe in the the govt's power to spend it's way out of depression/recession but if they don't need the money I'd rather keep it in my pocket.

[HughBeaumont]

7. K & R.

I've long attested that it's a poisonous myth that needs to be struck down, as it doesn't even remotely square with the facts.

http://journals.democraticunderground.com/HughBeaumont/94

http://journals.democraticunderground.com/HughBeaumont/90

http://journals.democraticunderground.com/HughBeaumont/86

http://journals.democraticunderground.com/HughBeaumont/64

Our refusal to tax the rich has left this country in the worst fiscal shape since the mid-30s.

[W_HAMILTON]

8. Only idiots would think otherwise.

Remember during the presidential campaign, when McCain brought up Ireland for their low corporate tax rate?

Well, they have 13% unemployment.

The Japanese have one of, if not the highest corporate tax rates in the world, and they have a 5.5% unemployment rate.

Corporations will simply take their tax breaks and run to a cheap-labor country and use the savings to pad their EPS even further. It's really ignorant to think that lowering taxes on corporations will have true effect on employment in our country.

[hack89]

9. Stupid oversimplification - ignores state tax policies

Look at Rhode Island - we are a high tax state with a failing economy. Our state tax policies view business as a golden goose to fund social programs and state government. In contrast, Massachusetts lowered their taxes on business. Consequently many Rhode Island businesses moved over the border. If we want to build our economy we have to cut our taxes to at least Massachusetts levels.