Growth and Taxes

| Fri May 13, 2011 2:19 PM EDT

Reihan Salam wants to persuade us that raising tax rates on the rich is bad for growth:

How can we possibly believe that low marginal tax rates are good for growth if we’ve had lackluster growth and relatively low marginal tax rates! The relevant question is this: would growth performance have been even worse under higher marginal tax rates? The problem, of course, is that this question is extremely difficult if not impossible answer. The folk response to this question is, “Well, growth was spectacular in the 1990s, after an increase in MTRs!” Which is true! But one can again argue that growth would have been stronger had MTRs been lower.

But this isn't an argument. It's just idle speculation. Top marginal rates went down under Reagan and growth was good. They went up under Clinton and growth was good. They went down again under Bush and growth was sluggish. That's not a slam dunk case, but it's at least actual evidence suggesting a pretty weak relationship between growth and taxes. Of course you can say that maybe growth would have been better in all three cases if tax rates had been even lower, but that's only because you can say anything. But where's the evidence?

Later there's this:

My basic view is that, for the reasons Alan Viard and others have carefully explained, high marginal tax rates have negative incentive effects that outweigh the potential revenue gains....

So I clicked the link. And Viard, again, doesn't present any evidence at all, careful or otherwise. Go ahead and see for yourself. There's a section titled "The Harm from High Marginal Tax Rates," but all it does is explain in general terms that taxes on income reduce the returns to work. This is so obviously true that I'm pretty sure no one has ever disputed it. The question is whether, in the real world, higher tax rates actually reduce the amount of work people are willing to do. As it happens, there's some evidence in both directions, and there's evidence suggesting different answers for different groups of people. Beyond that, we'd also like to know how big the effect is. How it compares to other ways of raising revenue. What the distributional impacts are. Etc.

So I guess what I'd like to know from Reihan is why he thinks that raising the top marginal rate from 35% to 39.6% would be so disastrous. What actual evidence is there that it impeded growth in the 90s? How big does he think the impact would be? Why would more regressive options be so obviously better? There's a real lack of serious evidence linking modest changes in the top marginal income tax rate to lower economic growth, but it's become practically a religious obsession on the right regardless. It needs something better than that.

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