Tax Cuts Don't Seem to Have Much Impact on Growth

Actually Tax Cuts Don't Seem to Have Much Impact on Economic Growth...

It has been something of an article of faith among conservatives that the solution to America's problems is in smaller government and lower tax rates. The argument on taxes goes something like: 'We need to unleash the wealth creators, who stimulated by the prospect of more income (due to lower tax rates), will create wealth for all of us.' And, that any tax increase -- for even the wealthiest taxpayers -- would have catastrophic consequences.

Actually the post World War II American economy provides a nice empirical test of this hypothesis -- the maximum marginal income tax rate gradually declined from about 90% to about 35%. Shouldn't this decline have lead to an explosion of economic growth as our wealth creators were unleashed? Sorry, Sarah Palin... it didn't.

During the ultra high tax 1950s (top marginal income tax rate of 90%), the United States had some of its best real economic growth (over 4%/year). And, for the decade where we had our lowest marginal income tax rates -- we had our worst real economic growth (about 1.5%/year). (See Table 1 below.)