Sunday, September 4, 2011

Taxing the Rich is Good for the Economy

Top Federal marginal income tax rate from 1913 to 2011
Panderbear just loves this table! It provides historical perspective for the tax history impaired. It shows, among other things, that the top federal income tax bracket is currently well below its nearly one hundred-year average.

Putting aside the issue of tax rate fairness discussed in a previous post, what does this table tell us? Panderbear directs your attention to the 1920 to 1925 time frame. The top marginal tax rate plummeted more precipitously then than at any other time in the history of incomes taxes. Less than 5-years later we had the epic 1929 stock market crash followed by the Great Depression.

During the Reagan administration the top marginal tax rate again plummeted. After a period of increased rates under President Clinton, the last time we had a balanced budget, the rates declined again under President Bush. And here we are struggling to shake off the effects of the Great Recession.

Two precipitous drops in the top marginal federal income tax rate followed by one Great Depression and one Great Recession. Is there a causal relationship between lowering the top tax rate and recession/depression? Panderbear doesn't know, but a plausible case can be made for that hypothesis. For much of the 20th century and up to the present, the economy has been consumer driven. When consumers spend the economy booms. When they don't the economy suffers. Lowering the tax burden on high wage earners has the effect of increasing the relative tax burden on middle class consumers. Feeling they are taxed more, consumers spend less and that's bad for the economy.

Coincidence is not proof of cause and effect. Nevertheless, the chart shows that high marginal income tax rates do not lead to economic downturns, but lowering them may. It's something for flat tax advocates to think about.

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  1. You are correct. It is a very stupid policy if you want to create jobs.

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