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No correlation between top tax rates and growth rates

Summary:
In a piece in WaPo today, I note in passing that there’s no persistent correlation between top tax rates and growth rates across the US time series, nor in oft-cited international data from Saez et al. This is widely understood among empirical public finance folks, but just in case, here are a few figures. As Krugman did the other day, I’m using top marginal income tax rates and 10-year, annualized growth rates of real GDP per capita. First, as Paul’s figure suggests, here’s a scatterplot that looks pretty random. One can, of course, plunk a regression line in there, and it has the “wrong” slope (higher rates associated with faster growth). To be clear, I neither think nor claim that higher top rates lead to faster growth (though such a case is sometimes made). These are just correlations.

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In a piece in WaPo today, I note in passing that there’s no persistent correlation between top tax rates and growth rates across the US time series, nor in oft-cited international data from Saez et al. This is widely understood among empirical public finance folks, but just in case, here are a few figures.

As Krugman did the other day, I’m using top marginal income tax rates and 10-year, annualized growth rates of real GDP per capita.

First, as Paul’s figure suggests, here’s a scatterplot that looks pretty random. One can, of course, plunk a regression line in there, and it has the “wrong” slope (higher rates associated with faster growth). To be clear, I neither think nor claim that higher top rates lead to faster growth (though such a case is sometimes made). These are just correlations. More on that in a moment.

No correlation between top tax rates and growth rates

Sources: TPC, BEA

In fact, 2o-year rolling correlations have a little something for everyone, which again, shows the absence of any systematic relationship supporting the high-top-rates-kill-growth story.

No correlation between top tax rates and growth rates

Sources: TPC, BEA

These are very simplistic ways to look at this, not at all dispositive. However, deeper looks yield similar results.

Moreover, I wouldn’t dismiss the simple correlations. My experience in this sort of work is that if the correlations aren’t there at this level over long time periods, you often–not always, of course–have torture the data to find them. In they are there, then you must check to see if the correlation is a function of a statistical problem (e.g., serial correlation) or a missing control variable. But if they’re not, it’s often telling you the argument that they are is going to be a heavy lift, very possibly involving more confirmation bias than honest analysis.

Jared Bernstein
Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute, and between 1995 and 1996, he held the post of Deputy Chief Economist at the U.S. Department of Labor.

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