Do Higher Taxes Slow Economic Growth?

Recently I heard someone say that raising taxes will cause the economy to grow more slowly and reducing taxes will cause the economy to grow more quickly.

We can compare tax rates and economic growth for ourselves to see if this is true. This link goes to historical GDP data: https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey. (On the BEA link above, when you get to the web page click on "Section 1," then "Table 1.1.1," then "Modify" to choose the years you want to look at.)

This link goes to historical data on top marginal tax rates: https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates.

Using the data from these two web sites let's see what happens to GDP growth as tax rates change.

[Note: The Big Con by Jonathan Chait is an excellent book about supply side economics. If you click on this link to buy it Anything Smart will earn a commission. Thanks for your support.]

In 1982 Reagan cut the top tax rate from over 69% to 50%.
In 1987 he cut it to 38.5%.
In 1988 it was down to 28%.
Then, in 1991 tax rates started going up again.
So, the Reagan era of low taxes was from 1982-1990.

Looking at the GDP table we can see the GDP grew at an average rate of 3.44% during this period.

If we look at the decade before the Reagan tax cuts it looks like the supply siders might be on to something. From 1972 to 1981 the GDP grew at 3.11% per year. That is good growth, but slower than Reagan's. Does that mean the Reagan tax cuts spurred economic growth?

Let's go back another 10 years.
From 1962 to 1971 the GDP increased at an average of 4.36% per year.
This is much faster than Reagan's growth, and this was long before the Reagan tax cuts.
If the fast economic growth of the 1980s was caused by the Reagan tax cuts, what caused the even faster economic growth of the 1960s when tax rates were much higher?

So, do higher taxes cause slower economic growth or not?
Let's take an extreme case.
From 1951 to 1963 the top marginal tax rate was always over 90%.
If high taxes slow the economy down we should see slow economic growth during this period.
But from 1951 to 1963 the GDP grew at 3.8% per year!
So, we ask again, if the Reagan tax cuts gave us growth of 3.44% why did we have faster growth in this earlier period when the tax rate was much higher?

[Note: The Big Con by Jonathan Chait is an excellent book about supply side economics. If you click on this link to buy it Anything Smart will earn a commission. Thanks for your support.]

What happened after Reagan?
In 1991 the top tax rate went up from 28% to 31% and in 1993 it went up again to 39.6%.
If higher taxes slow the economy down, we should see that happening in the 1990s as taxes go up.
But from 1991 to 2000 we see that GDP growth was averaging 3.45%.
That is almost exactly the same as what we had under Reagan.

The truth is we had good economic growth under Reagan. But we can find earlier periods when we had even faster growth with higher taxes. And in the period after Reagan, we had equally good growth with higher taxes.

This is just a quick look at changing taxes and changing rates of economic growth.
W could do a more thorough study by looking at other factors such as total taxes rather than top marginal rate.
We could look at a different period of history or a different country than the United States.
We could look at data from individual states or cities....

But what we know for now is, that with the data we looked at here, there does not seem to be any evidence that lower taxes cause the economy to grow faster.

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Copyright © 2021 by Joseph Wayne Gadway