Taxes, Taxes, Taxes

TAXES, TAXES, TAXES….Matt is right to point to this piece of nitwittish writing from Larry Kudlow, one of National Review’s seemingly endless stable of embarrassing shills on economic matters. Commenting on a perfectly sound and well backed up article in the New York Times that highlights the embarrassing lack of evidence to support the notion that tax cuts increase economic growth, Kudlow says:

Back at home, real-world evidence throughout the 20th century shows a stark contrast between high- and low-tax policies. In the 1920s, the Harding-Coolidge-Mellon tax cuts produced the Roaring Twenties. But repeated tax increases by Herbert Hoover and Franklin D. Roosevelt produced and prolonged the Great Depression.

John F. Kennedy vowed to get the economy moving again after the sluggish growth of the high-tax Truman-Eisenhower years. JFK made good on his promise when he lowered the top income-tax rate from 91 percent to 70 percent. The result was the 1960?s boom. Twenty years later, Ronald Reagan turned stagflation into the 1980?s boom by slashing the top personal tax rate from 70 percent to 28 percent.

President Clinton, you might recall, raised taxes in his first term, but lowered them in his second term, contributing to a burst of investment and growth. Note the difference. In his first four years, the economy increased at a 3.2 percent annual rate. But his next four years produced a 4.2 percent economic pace.

As near as I can tell, Kudlow just cribbed this from an old Heritage Foundation memo, and it shows. Mellon mostly lowered taxes from World War I peaks, and in any case personal income taxes amounted to only about 1% of GDP in 1920. It’s absurd to think that rate cuts at that level had any serious impact on economic growth. Pace Kudlow, the 50s did fine even with high marginal tax rates, and the 60s boom was due as much to garden variety Keynesian stimulation as it was to JFK’s tax cuts. As for Reagan, he cut taxes once and then raised them every year after that (details here) ? followed by increases from both Bush Sr. and Clinton. Despite the promises of the supply siders, federal tax receipts fell sharply in 1982 and didn’t recover to their previous levels until 1998.

The chart on the right tells the story. As you can see, federal taxes (excluding payroll taxes) have declined pretty steadily for the past half century. During this period, growth rates have gone up and down, but in general have also declined fairly steadily. In fact, if you’re looking for an explanation of declining growth rates, you might want to look toward the taxes that have gone up during this time: state and local taxes and the payroll tax, the most regressive taxes we have. Still, even when you add those in (see chart here), the total tax take in the United States has only gone up from 24% of GDP to about 28% of GDP in the past half century. That’s just not enough to have much of an effect on anything.

The plain fact is that you can find plenty of examples of high taxes and high growth, low taxes and high growth, and every other combination of tax rates and growth rates. Within a very broad band of tax revenues (say, 15% of GDP to 45% of GDP), there just doesn’t seem to be much correlation between taxes and growth. Kudlow may think this “defies the laws of common sense,” but it’s empirically true nonetheless.

As Jonathan Cohn points out, the United States is smack in the middle of this broad band of tax rates, and we have plenty of scope to raise taxes if it’s necessary to fund programs we want to fund. And despite the conventional conservative wisdom, modest increases would almost certainly have virtually no effect on economic growth. The supply siders may say otherwise, but they just don’t have the evidence to back up their claims.

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