The Myth of the Lower Marginal Tax Rates
Conservatives’ Go-To Growth Solution Doesn’t Hold Up
SOURCE: AP/J. Scott Applewhite
If you asked any random conservative lawmaker the most important thing the federal government could do to promote economic growth, he would probably answer, “lower the top marginal income tax rate.” A few examples:
Speaker John Boehner: "We’ve seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes.”
Sen. Jim DeMint: "But we also need to just cut the top marginal rate for individuals and corporations so that we’re more competitive and companies can look way out in the future and know they’ll have a competitive tax rate.”
Club for Growth: “To stimulate GDP growth, a tax cut has to cut the marginal tax rates upon which the decision makers in the economy base their decisions to work and, above all, to invest.”
Cutting taxes for the wealthy has become conservatives’ one, and often only, response to any economic problem. Just one problem: History doesn’t bear them out. Not at all.
The top marginal income tax rate has ranged all the way from 92 percent down to 28 percent over the last 60 years. With such a large range, it should be easy to see the enormous impact of lower rates on overall economic growth, as conservatives routinely claim. Years with lower marginal rates should boast higher growth, right?
That’s definitely not what happened. In fact, growth was actually fastest in years with relatively high top marginal tax rates. Back in the 1950s, when the top marginal tax rate was more than 90 percent, real annual growth averaged more than 4 percent. During the last eight years, when the top marginal rate was just 35 percent, real growth was less than half that.
Altogether, in years when the top marginal rate was lower than 39.6 percent—the top rate during the 1990s—annual real growth averaged 2.1 percent. In years when the rate was 39.6 percent or higher, real growth averaged 3.8 percent. The pattern is the same regardless of threshold. Take 50 percent, for example. Growth in years when the tax rate was less than 50 percent averaged 2.7 percent. In years with tax rates at or more than 50 percent, growth was 3.7 percent.
These numbers do not mean that higher rates necessarily lead to higher growth. But the central tenet of modern conservative economics is that a lower top marginal tax rate will result in more growth, and these numbers do show conclusively that history has not been kind to that theory.
Michael Linden is Director of Tax and Budget Policy at American Progress.
- Rich People’s Taxes Have Little to Do with Job Creation by Michael Linden
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