Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Everything that appears on this blog is the copyrighted property of somebody. Often, but not always, that somebody is me. For things that are not mine, I either have obtained permission, or claim fair use. Feel free to quote me, but attribute, please. My photos and poetry are dear to my heart, and may not be used without permission. Ditto, my other intellectual property, such as charts and graphs. I'm probably willing to share. Let's talk. Violators will be damned for all eternity to the circle of hell populated by Rosanne Barr, Mrs Miller [look her up], and trombonists who are unable play in tune. You cannot possibly imagine the agony. If you have a question, email me: jazzbumpa@gmail.com. I'll answer when I feel like it. Cheers!

Sunday, February 7, 2010

More About Taxes and GDP

The economic gurus at the Cato Institute, the Heritage Foundation or lots of other glibertarian think tanks and web sites will tell you that tax increases are bad for business, tax cuts good for business.

Let's explore.  No make-believe pseudo-correlations this time: actual taxes and real economic performance.  First off, here is a graph of top tax rate percentages, since 1950.   Red segments are years of Republican Presidents, Blue segments, Democratic Presidents.

Except for the Clinton years and a small blip at the end of the Johnson presidency, the track has been downward - relentlessly and dramatically.

Here is the same data, along with Year over Year GDP growth.

Yeah, it's busy, but you have the first, simpler graph for comparison.  And this is all about comparison.  I've shown GDP growth over the period time after time, but not in this context.  If lower taxes are good for the economy, GDP growth should be higher now than it was 50 years ago, after all these tax cuts.  Right?  Well, look what's happened.  GDP YoY percentage is shown on the rght hand scale, in brown.  GDP growth is an extremely volatile number.  But the best fit line has a clear downward slope.  Only one year since 1980 has presented a high number in the range of the highs in the 50's and 60's.

Let's zero in on St. Ronnie and the devil Clinton.

Two sizable tax cuts during the Reagan years led to two increases in GDP.  If you look at the detail and ignore the big picture.  The 7.2% GDP growth of 1982 occurred coming out of a recession.  The next uptick came in 1988, two years after the 1986 tax cuts, and only reached 4.1%.  After that, the bottom fell out   Clinton came in, there was a modest tax increase, and GDP recovered a bit.

There is nothing particularly conclusive about this, except for one simple fact.  The glibertarian tenet that tax cuts help the economy and tax increases hurt the economy simply cannot be supported by facts and data.  It is dogma: an ideology that cannot be squared with reality.

Just for kicks, here is the income level that kicks in the top tax rate.

 In 1988-90, the top tax rate kicked in at about $30,000.  So, somebody making a decent, but less than stellar income was paying at the same marginal rate as multimillionaires.   Sweet.  Clinton's administration wasted no time getting that top rate back close to where it belongs.  The result?  Modestly increased GDP growth and a balanced budget.  No wonder the Repugnicants hate him.



Hootin' Anni said...


Thanks for stopping by my blog Saturday and leaving such a sweet, sweet comment.

Have a great week ahead.

J said...
This comment has been removed by the author.
J said...

Well, stretch out the GDP growth graph a bit and it's not that volatile--numerically speaking, it's only fluctuating a few percentage points. Nothing like the tax rate changes.

On the whole I agree with you. The data shows that at times there was GDP growth even with high taxes, and the lip-ertarians are thus mostly wrong in terms of econ/ and supply side ( they also forget that Clinton, supposed tax and spender Demo did not even match Nixon in terms of tax rates)--yet the rabid GDP growth under JFK and Reagan does offer a bit of support for supply siders --JFK slashed Ike's 90% rate to like 70%, and RR's made big cuts on Carter. There are other factors, like recession , but there does appear to be a sort of windfall effect with a big tax cut (and that does correlate at times)--not that that's necessarily "good"for the population at large.

The supply-sider frat boy type generally means that tax slashes are good for him and his cronies at the country club, and maybe their favorite caddies--and bigger tips at their favorite mafia bistro, etc.

Galbraith thought GDP mostly useless as an indicator, and slanted towards...the producers and capitalists themselves.

Jazzbumpa said...

Well I'll have to say that a number which averages a bit less than 4 over a 50 years span, and has annual values jumping around between -2 and +8 is pretty damned volatile; especially when you can cover the whole range in only two years. This is not an artifact of scaling.

Sure the tax changes have been big, but mostly monotonic. Top tax rate has not been a volatile number, it's been an alternating flat level then plunge number.

I think one can make a case that at 90%, we were on the far side of the Laffer curve. One certainly cannot make that case at 35%, and probably not at 50%.

I agree GDP is not an ideal metric. In fact, I'm sure Reagan's showing was artificially boosted by 1) deficit spending, and 2) the rebound out of the 80-1 recession. If there is a better metric, I'd love to know about it.

JzB the volatile trombonist

J said...

A few percentage points a year volatile? Not really. Volatile would be like the crude oil, energy, or gold markets or indexes, or any number of stocks, with 10% to 25% or more moves every few days, and then 50-75% moves up and down over a decade or so. The rise in the value of crude barrels over the last few years was nothin' but obscene---most out in Consumerland don't realize the leverage involved in some futures and stock options.

A ten dollar increase in crude would would bring back at twice the original price of the contract; e.g. some texass or silicon high roller or bank buys a million dollars worth of oil contracts, and doubles it, or more-- 200-300% profit-- when it goes. And the crude went up, what 50 dollars over the last five years. Phuck. (scuzi rant)

Gold prices at times move 10-20% in a week, and make a few deep pockets a few million shekels ( some lose....but a myth that gains and losses even out. holy Mystery market manipulation batman).

Besides, no one's really gambling, er speculating on the GDP, I don't think. GDP may be a factor for economists but it's not a commodity or stock itself (tho a GDP rise means bull to some stock-shysters).

A better metric? Maybe preferred country club o' the month metric.... Hillary's time of the month metric?

J. the dark cloud

Jazzbumpa said...

Ah, well, it's all in what you take to be a benchmark. Sure the things you mentioned are wildly volatile.

GDP growth, by comparison, is only tamely volatile.

But one year to the next provides some pretty dramatic changes in magnitude, and direction.

I'd say a 60 Yr average of 3.34, with a standard deviation of 2.42 is pretty volatile.


J said...

Well, say the GDP growth rates were temperatures in January in Fargo, or somethin', and they looked like the graph. That's not really a wide variation, right, so the stdev. not that big....and thus not really "volatile," as far as I understand it. It's more like oscillating a lot, but not going very far---ie. grain or cotton futures will do that, move a few cents in each direction all the time, but a big move of like a few dollars means boomtown (or bust).

I'd say given a possible range the GDP growth rate's fairly stable, tho' with scaling it can be made to look pretty scary (or when supply siders want to praise St Reagan,and diss commie Carter).

In ways, the nearly flat GDP shows it's not really that accurate a metric or something-- tho' the free market lovers now point to the booming China GDP as proof of something (like proof of Google, Apple, MSN, Walmart movin in, and setting up the corp-casinos).

Jazzbumpa said...

I think we're bogged down in semantics. GDP growth is irregular, not monotonic, can be either positive or negative in any given year, and can only be vaguely (if at all) predicted in any future year on the basis of past performance. How Dat?

The underlying sad truth is that GDP growth has stagnated over the past several decades, with no help in sight. My belief is that policy matters, and that most conservative policies are generally counter-productive. BushCo, OTOH, exhibited economic insanity. My fear is we'll never recover.