There’s a good sentence in Menzie Chinn’s post comparing effective tax rates for the different income quintiles that I wanted to bring to your attention. Here it is:
there is no obvious correlation between the tax rate applying to the top quintile and per capita GDP growth.
I believe that to be true. I strongly suspect that Dr. Chinn intends that as part of an argument to increase the tax rates of the highest income earners but I think it needs to be emphasized that the finding cuts both ways. “No obvious correlation” is no obvious correlation, neither a positive nor a negative correlation. We didn’t get faster per capita GDP growth by cutting taxes and we won’t get faster per capita GDP growth by raising them. I can’t tell you how often I’ve heard and read the claim by PhD economists (including some Nobel prize winners) that the higher tax rates that prevailed during the Clinton Administration caused the faster growth during the Clinton Administration, a claim I have always found absurd.
We might get faster per capita GDP growth with either a tax cut or a tax increase if it were part of a greater, longterm strategy for doing that but we really don’t do strategy in this country. We do tactics and adjusting the income tax is a weak tactic for improving GDP growth and an awful strategy. More on the tactics/strategy issue later today if I get around to it.