Tuesday, August 14, 2012

GDP Growth Rates vs. Tax Rates

This is just a quick chart (for a Facebook conversation I'm having) that depicts U.S. growth rates (chained 2005 $, BEA data; units on the left) vs. top marginal income tax rates (units on the right) vs. GDP share taken by the top 1% (units on the left). The neoliberal hypothesis (i.e., lower tax rates will produce higher growth and a higher share of income by the most wealthy will allow them the confidence and capacity to invest, creating growth) is clearly not evidenced by the actual data. This hypothesis is based on an interpretation of the Laffer Curve, which presumes a bell-shaped curve--to the left of the peak of the curve, your tax rates are too low to sustain growth, and to the right, taxes are too high to sustain growth. The idea is to find the perfect "peak" for maximum efficiency. There is little empirical support for the Laffer Curve, and in fact, cross-cultural longitudinal data indicate that tax rates have very little impact on growth.

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