Data show more economic growth when top tax rate is higher

November 15, 2010 1 min read

I was wondering if there is any statistical data to support the notion that the really rich need a lower tax rate to help get economic growth kick started. I found data for both top tax rates and GDP growth at http://www.truthandpolitics.org/top-rates.php and http://www.bea.gov/national/nipaweb respectively.

I ran a simple correlation analysis between the highest tax rate and the highest tax bracket in the US between 1930 and 2010.  Just doing a regression with each year being a data point, there was a positive correlation (when top tax rates go up, GDP growth goes up) coefficient (Pearson’s) of .256.  (Not a strong statistical correlation, but still interesting that it is a positive correlation).  When I changed the analysis to look at the average growth during years that had the same tax rate (for instance there was a 39.6% top tax rate between 1993 and 2000 and the average GDP growth was 3.6%), the correlation coefficient jumped to .426. (I’m sure many others have found this same correlation, but it was fun running the numbers myself!)

What this tells me is that there is no historical basis for lowering the rate for the top tax bracket – and, in fact, there may be a good argument for actually increasing the rate for the rich.

But, those of you who know me know that I don’t believe taxes have a darn thing to do with growth, anyway – it is all demographics, baby….