Here's his graph plotting the top marginal tax rate against annual real GDP growth since 1947:
Of course, this is just a simple graph; it's not a dispositive argument for higher marginal tax rates. And it wrongly conflates annual real GDP growth with the productive incentives of workers. For instance, last week's GDP numbers tell us that the economy grew at a healthy clip last quarter – 5.7%. For some, this is a cause to celebrate. But with structurally high unemployment, limited access to credit, and waning consumer confidence, GDP growth has very little to say on whether tax payers should work more or less.
Yet Kwak's overall point remains. For those who argue that higher marginal tax rates are bad for the economy, I wonder if this graph will give them pause. At the same time, I also wonder how someone like Greg Mankiw would respond. He, of course, has argued forecefully that higher marginal taxes create perverse work incentives. From last October's NYT:
The verdict on supply-side economics is mixed. The most striking claim associated with the theory — that cuts in marginal rates could generate so much extra work effort that tax revenue would rise — is unlikely to apply except in extreme cases. But substantial evidence supports the more modest proposition that high marginal tax rates discourage people from working to their full potential.You know what? It seems the verdict on marginal tax rates is just as mixed.
"Yet Kwak's overall point remains. For those who argue that higher marginal tax rates are bad for the economy, I wonder if this graph will give them pause."
ReplyDeleteNot really. Or at least not until I see analysis from people much smarter than me.
But this 1)doesn't pass the smell test, given the scores and scores of heralded economists who have made a career of arguing the exact opposite (zB.: Friedman, Milton). If the non-correllation were this obvious, you'd think that it would've come to light already. It isn't actually a ground-breaking idea to compare marginal tax rates to GDP growth...
and 2) It seems to me to be widely exaggerated to say that the existence of this one study someone implies that "the verdict on marginal tax rates is just as mixed.". It may be, but this one study isn't dispositive on that score.
Like all sciences, consensus is irrelevent. But I'd need to see how other economists view this study before I start advocating 90% tax rates.
Uh-huh.
ReplyDeleteSo are you arguing that since Milton Friedman weighed in on the issue, that means it’s settled? If so, that fails to recognize that our understanding of worker incentives has progressed in the last three-or-so years since his death, or whenever he last looked at the issue.
And with regard to the analysis of “much smarter” people: isn’t the Obama team filled with a whole bunch of super-smart economists? I mean, many would argue that with the likes of Larry Summers, Tim Geithner, Paul Volker, and Christina Romer providing economic advice, Team Obama has got some of the smartest people around. So if they’re advocating higher marginal taxe rates – and I don’t if they all are – then doesn’t that necessarily indicate that the evidence is mixed?
What am I missing here?
I listed Friedman as an example. (though I guess that's what I get for using the german "zB" as "for example"). Obviously I wasn't implying that only Friedman need comment since the whole crux of my post was that one person saying something is interesting but not dispositive.
ReplyDeleteAs for Obama's team...again, so what? Of course they're smart. You don't end up in those positions unless you're smart.
But whole generations of economists would say that their idea is wrong. In fact, I suspect that the large majority of economists would suggest that marginal taxation does have a significant impact on behavior. I also suspect that the evidence isn't mixed, and that if anything, the interpretation is mixed (for some).
In part I think this because a comparison of GDP to marginal tax rate is so obvious and basic that one would think that every economist on the issue has researched that data. If it really did have such a confused result, why would scores and scores of economists argue otherwise? And why wouldn't their critics have pounced on that data decades ago?
All of a sudden this guy says "Hey! Look at this?" Maybe it's true, but it just doesn't pass the smell test for me.
Lastly, I generally understand the Democratic position on most economic issues (Obama's team included) to be "Yes, it will theoretically lead to a decrease in economic output, but 1)it isn't significant enough to matter, and 2)You get a payoff in [insert social equality issue here].
I don't think they usually argue that increased marginal taxation leads to higher output for those being taxed.
"I don't think they usually argue that increased marginal taxation leads to higher output for those being taxed."
ReplyDeleteI should modify that to include "or no impact at all."
Please, Esquire, leave it to me to decode the Democratic position on economic issues. (Though you did an admirable job.)
ReplyDeleteLike the true ideologue, you suggest that "whole generations of economists" would say Team Obama's ideas are wrong (even though Team Obama has, as VM notes, whole generations of economists within it). You also the evidence "isn't mixed," only its interpretation, which boggles the mind my mind (if you a statistic falls in the forest, does anyone hear it?).
No, actually, the economics isn't at all settled. Yes, most experts agree that marginal tax rates can influence behavior, but a) it's not known how much and b) at what point that occurs. If growth rates remained high during periods of high tax rates, then shouldn't that discount the supposed power high tax rates have on people's desire to work?
So what's the limit? Conservative economists suggest a lower top rate, while left-wing ones don't see anything wrong with nudging it up past 40% (though I wonder if anyone would go past 50% in this environment).
That's the debate, and it's been alive and well for a long time now. I thought we've been having it for the last three years.