Ever since President Obama was on the campaign trail, he has been derided by Republicans for vowing to allow the Bush tax cuts for the richest two percent of Americans to expire. And that’s because, to Republicans, there are few things more important than the top marginal tax rate. And to hear Republicans tell it, marginal tax rates are the be-all and end-all of economic growth.
“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,” said Speaker of the House John Boehner. “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,” said Sen. Jim DeMint (R-SC). “The economics profession has been really clear about this – higher marginal tax rates create a drag on economic growth,” added House Budget Committee Chairman Paul Ryan (R-WI).
But is the data as clear as Ryan suggests? In fact, as Michael Linden, Director of Tax and Budget Policy at the Center for American Progress, found, “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.
As Linden put it, “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.” Indeed, these numbers put the lie to the common Republican refrain that Obama and Democrats in Congress are trying to implement a “job-killing tax hike” by putting the top tax rate back to where it was under President Clinton.