A Conservative Estimate

I was involved in a discussion on FB with a very intelligent Fiscal Conservative who asked an interesting question. FB does not allow for the level of detail to answer her question—so I am going to bring her question—and some conjecture at a response—over here.

I'd like to see some data supporting the idea that high tax rates on the "super rich" lead to a "stimulated economy" adjusting for the obvious (and major) influences of world wars.

First, I think it worthwhile to point that that no major Democrats that I have heard of are proposing to raise tax rates on the rich for the purpose of stimulating the economy. The leftist argument (as I made in my previous post) is that the Conservative concept that using tax CUTS as a means of stimulating the economy is a truthiness (an idea believed in with no basis in fact), and that there is no data to support the idea that lowering taxes to the highest-income individuals would stimulate the economy.

However, her question is an interesting one, which I would like to take a stab at:

Our goal is to see if there is any identifiable correlation between high tax rates for the highest class of earners (my quantifiable definition of “super rich” in her quote) and a stimulated economy. For this instance I define stimulated economy as one that shows notable growth and low unemployment rates (thereby benefiting all within the market, from the workers to the managers).

In my previous post I hit some data that is relevant to the question, most notably unemployment rates and tax rates. Looking at the following Graph, we see that, for the period in our history where tax rates were at their highest (1942-1962) taxes on the highest earners were over 90% and unemployment averaged under 5%. I don’t think we will have any disagreement that the sustained low unemployment and economic growth that the country saw from 1942-1962 qualifies as a period in which the economy was “stimulated.”

However, as noted in her comment—the war was a HUGE factor. It is impossible to completely isolate the impacts that the increased spending associated with the war had on the economy, but we can make a pretty decent run at it. First—we can look at the total Federal spending from 1920-present (green line):

We can see a HUGE spike in spending from 1940-1950—which obviously would have an effect on unemployment, but after 1950 it settles down nicely. From 1950-1960, I think we may have a decent sample. The tax rates on top-tier earners were at +90%, and unemployment was averaging under 5%. This period is not affected by abnormally high war spending.

The situation is way too complex for us to identify any direct relationship. But I think that her question is, in part/as best it can be using publicly available federal databases, answered—from 1950-1962 we had normalized federal spending (non-war levels), very high taxes on top-tier earners (90%+) and low unemployment (>5% average). It was a period of economic stability and growth.

The Crux:

This is not to say raising taxes would help the economy (though I think using some basic greed-based psychology and some conjecture one COULD make that argument)--it's just addressing her question regarding of high tax rates mate well with a stimulated economy--and the available data from the mid 20th century suggests that they get it on nicely. (hot!)