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


EconomyTax Fairness

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