Economics

Actually, the Diamond-Saez op-ed in the WSJ is even worse than I first thought

I wrote earlier today about the Wall Street Journal op-ed from economists Peter Diamond and Emmanuel Saez. But in my haste, I sort of skipped over this bit:

Neither does international evidence support a case for lower growth from higher top taxes. There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries.

For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.

This is egregious. Somehow when I think of the 1970s, supply-side tax cuts aren’t the first thing that come to mind.

Why would Diamond and Saez start from 1970s instead of 1980? Margaret Thatcher didn’t take office until 1979,  Ronald Reagan until 1981? If you run the numbers from 1981-2010, you find out, for instance, that the U.S. economy grew by 62% vs. 46% for France. And the UK grew by 78% vs. 57% for Germany.

Here is another way of looking at these numbers, comparing per capita GDP adjusted for purchasing power (via Scott Sumner):

Both Germany and France lost much ground to the U.S. and the UK. Now taxes don’t explain all of this. In addition to lowering marginal taxes rates, the U.S and UK became less statist via deregulation and privatization. Sumner:

At the time Margaret Thatcher became Prime Minister in 1979, decades of statist policies had turned Britain into the sick man of Europe. The government owned the big manufacturing firms in industries such as autos and steel. The top individual MTRs on income were 83 percent on “earned income” and an eye-popping 98 percent on income from capital. Frequent labor strikes paralyzed transportation and led to garbage piling up in the streets of London. Much of the housing stock was government-owned. Britain had lagged other European economies for decades, growing far more slowly than most economies on the continent. Thatcher’s reforms were among the most comprehensive in the world, and by the mid-1980s, Britain was growing faster than the other major European economies. By 2008, it had a higher per capita income than Germany, France, and Italy.

The United States was doing better than Britain in 1980, but not particularly well. We had also been growing much more slowly than Europe and Japan. Unlike Britain, we were still richer than most other developed countries, and so many people viewed this convergence as partly inevitable (the catch-up from World War II) and partly reflective of the superior economic model of the Germans and Japanese. It was widely expected that Japan and Germany would eventually surpass the United States in per capita GDP. Paul Samuelson claimed in 1973 that Soviet GDP might surpass U.S. GDP as soon as 1990.5 Obviously none of this happened, and by the 1990s, the United States was growing faster than most major European economies.

Both [Germany and France] passed some reforms, but much less than Britain. They suffered a decline relative to both Britain and the United States. Note that the German data for the whole time period include the East, so their relative decline cannot be explained by the 1990 absorption of that less-productive region.

The lesson here: Lower marginal tax rates and less government interference are pretty important for economic growth.

 

3 thoughts on “Actually, the Diamond-Saez op-ed in the WSJ is even worse than I first thought

  1. The size of government is not just taxing, but total spending which includes borrowing – which eats up what could otherwise be investment capital. It is also the double-barreled effect of regulation – direct costs of regulatory compliance, and secondary costs which include opportunity costs. Total government cost (federal, state, local; spending and regulations) was less than 10% in 1900, about 30% in 1950, and is now around 60% of GDP. The costs of regulation compliance are about 20% of GDP. The costs of government are now absurdly, pathologically high.

  2. “The lesson here: Lower marginal tax rates and less government interference are pretty important for economic growth.”

    This is the wrong thing to assume. Between 1947 and 1979, GDP growth surged at an average annual rate of 3.8%, compared to a paltry 2.3% since 1980 (as of 2011′s end).

    Productivity growth has averaged 3.7% between 1947 and 1979, compared to only about 2.5% since.

    Median incomes, adjusted for inflation, climbed between 2-5 times the rate that median incomes, inflation-adjusted, have grown since 1979, between 1947 and 1979.

    Marginal tax rates have hovered above 70% between 1947 and 1979, and federal regulations were twice as expansive as they are today.
    http://www.huppi.com/kangaroo/L-fortyyears.htm

    Effective tax rates were above 50% for the very richest of Americans between 1950-1981, but have since fallen to under 22%, and tax breaks and loopholes have proliferated:
    http://www.americanprogress.org/issues/2011/06/low_tax.html

    Your post is yet another piece of misinformation that serves the interests of concentrated economic power at the expense of the overall economy.

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