The Trickle-Down Economics Lie In One Chart

The chart below displays (in green and red) the percent change in Real Gross Domestic Product (Real GDP) and displays (in orange) the top marginal earned income tax rate for each year from 1947 to 2010.

Gross Domestic Product is the standard we use to measure how well the economy is doing. A negative GDP percent change for two quarters (6 months) is the official definition of a recession. “Real” GDP is GDP adjusted for inflation.

The top marginal tax rate is the tax paid on every dollar in that bracket. Do not confuse this with the average tax rate which is total tax paid as a percentage of total earned income. For example, if the top tax rate starts at $200,000 and a person earns $210,000, only $10,000 would be taxed at the top tax rate. This is important to remember when you hear Republicans crying about ‘class warfare’.

Real GDP Percent Change vs Top Marginal Tax Rate - 1947-2010

sources: Internal Revenue ServiceBureau of Economic Analysis

click to enlarge chart

The first thing that is striking about this chart is just how deep the “great recession” of 2008-2009 was. It eclipses any other recession in modern times. Most of the other recessions barely even register.

The second thing displayed quite dramatically is the sharp decrease in the marginal top tax rate, from a high of 92% in 1952 and 1953 to a low of 28% in 1988 and 1989. The most recent top tax rate is 35% from 2003 to 2010 (and 2011) which is down from the 1990s when it was 39.6%.

Republicans say if we increase the top tax rate it will have a negative impact on the economy, but the chart clearly illustrates that at the same time the top marginal tax rate has trended down, so has Real GDP. As the top tax rate for high income earners has decreased we have seen reduced economic growth. Let me say that another way. While top income earners keep more and more of their income the growth of the economy has reduced from its 1950s and 1960s highs.

We are told by Republicans that tax breaks for the wealthy will lead to a trickle-down of wealth to everyone else. If that is true, shouldn’t it lead to greater consumption and greater economic growth? This chart shows otherwise.

The third interesting thing in this chart is the period from the early 90s to late 90s. During this time the top tax rate increased at the same time economic growth increased. The economic growth of the 90s isn’t enough to reverse the 53 year trend but it serves to debunk the idea that increasing the top tax rate will hurt the economy. But I can no more make the case that increasing taxes would help the economy as Republicans can make the case for the opposite. What I can say is that trickle-down economics doesn’t work. It’s a theory that has been in practice for some time, but with a growing mountain of evidence against it.

What this chart shows us is that the economy largely functions independently of the top tax rate for high income earners. So what’s the takeaway? Decreasing the top tax rate does not result in greater long-term economic growth, and because of that, if an increase to the top tax rate is necessary to fund programs and balance the budget, then that is exactly what we should do.

dks

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EconomyTax Fairness

#economic growth#economy#GDP#great recession#Gross Domestic Product#high income#lie#reaganomics#Republican#top tax bracket#top tax rate#trickle-down economics#voodoo economics

  • Americans need to wake up to their opressors

  • It is remarkable how pervasive a lie can become if it is repeated again and again with authority and conviction. This is the playbook by which free market ideologues and Republicans operate. As an added aid to their cause, many of them actually believe the lie, which means they don’t even know it’s a lie. But that doesn’t get them off the hook when there is decades of data that is in condradiction to what they profess.

  • People_matter_too

    Your chart is mislabeled. You’re graphing changes in real GDP, not current GDP. You’re also graphing the annual changes in real GDP rather than quarterly changes, which mean you’re losing some of the  recession spikes.

    In addition, it doesn’t make sense to use a linear trend line for the marginal tax rate, or to plot it as an area, for that matter.

    Trickle-down economics doesn’t work, to be sure. But this graph isn’t the best way to show it.

    • Thanks! You are correct it is Real GDP, not Nominal GDP. It’s not that I didn’t know it, I just failed to label it fully. I’ll update the chart soon to reflect that. And yes, by graphing yearly you don’t see all recession spikes. But the point of this chart was less about showing the recessions and more about comparing Real GDP changes to the top marginal tax rate. And besides, any recession that is worth mentioning is one that lasted for more than a year.

      You are probably right about the linear trend line. I wasn’t trying to project into the future, just trying to make it clear (as if it wasn’t already) that both chart items are trending down. The reason I chose “area” was because I wanted the top marginal tax rate to be the backdrop to Real GDP. Not sure that it much matters for the purpose of this chart.

      If you have a suggestion for what I should chart instead please let me know.

      • People_matter_too

        I checked the numbers and they’re accurate. (I generally do this no matter what the source.) I also created a graph to make sure that they matched, which they did.

        As far as the graph goes, it works better if GDP is an area and the marginal tax rate is a line.

        I’m unconvinced that this chart is showing what you’re trying to say, however. I’ll play with it a bit more and get back to you.

        You should get and read the book “The Burden and the Benefit”, by Bruce Bartlett. It’s a new, quite readable book about how taxes work, including recent tax changes, and about tax reform. He’s an economist who was a leading player in the Reagan tax changes, so he knows his stuff. I’m most of the way through it.

        • Thanks again. I’ll get an updated version of this chart uploaded later today or tomorrow. I’ll change the top marginal tax rate to a line and see if I like it better that way.

          Despite the name of this article, it probably would take many charts and a long explanation to say why trickle-down economics doesn’t work. But I think this chart, and these two charting metrics is one of the simplest ways of illustrating that there is no real connection between tax breaks for the rich and increased economic activity, which should be the result of trickle-down. I’ll admit that increased economic activity is an assumption, but it’s a reasonable assumption. If the wealth is supposed to trickle-down to everyone, logic would dictate that should lead to increased consumption of goods, hence increased economic activity (higher GDP).

          Bruce Bartlett is an example of the moderate, reasonable and logical Republicans that used to exist. Well, they still exist, but none are in the current congress. I’ll add that book to my read list.

        • Just updated the chart with your suggestions. Also added another y axis to separate the real GDP and top tax rate scales. Thanks again.

        • People_matter_too

          You have my sympathy. I make a lot of economic graphs and it can be very hard to come up with a graph that effectively “tells a story”. Your current version is much better, btw.

          I did two experiments with the data yesterday. One was to sort the change in GDP by margin ta rate rather than year. While still largely chronological, it presented a clearer picture of the relation of marginal tax rates. The other was to group the years by 6 brackets: 75-80%, 28%, 80% or higher, 50%, 69-80%, and 30-40%, and then make a simple bar chart of the average growth in GDP during those years. (The brackets are not ordered numerically but, rather, the order that the brackets came out when sorting by average change.

          The 28% needs annotation, however, since it was only two years (1988–1989) and it’s notable because the capital gains rate was also 28%. Having matching rates was key to the success of the 28% marginal rate, because it removed artificial incentives for the wealthy to move money from or to capital.

          Bartlett’s book is fairly easy to read, although it takes longer if you’re new to the tax economics field and are trying to really get what he’s saying. He’s a conservative, not a moderate: it’s only the twisted definition of conservative right now that makes him look moderate. He’s also an independent now, not a Republican, for similar reasons. He’s gotten a fair amount of TV time recently, but is blacklisted on Fox and the WSJ. Go figure. :/

          If you want to communicate privately, you can write to my name at gmail.com. I have a ton of economic and socioeconomic graphs from way too much time spent on analyzing data.

          • Wow, sounds like you are above my pay grade on this. 🙂

            I recently saw Bartlett on Bill Moyers. In fact his interview is posted as a “must watch” video on the far right sidebar (above).

            I sent you an email.

          • Well, I tried to send you an email but it was just returned. I used your Disqus username at gmail.com

            If you want, you can contact me using the Contact menu above. I’d like to see if you are interested in submitting any content to this site.

          • People_matter_too

            Oops. Replace the underlines with dots.