There is no historical relationship between marginal income tax rates and economic growth. In the 40 years after World War II ended, the top rate ranged from 50 percent to 91 percent. Meanwhile, the economy averaged 3.5 percent growth. In the last 20 years, when the top rate ranged from 28 percent to 44 percent, GDP growth averaged 2.6 percent. Even after excluding the recent recession, growth averaged 3.0 percent.
This shouldn't be surprising. Marginal tax rates do not impact people's propensity to work that much. Empirical studies show that, for most workers, the effect of income tax rates on labor supply is small or nil. Lower taxes do seem to increase workforce participation for married women--but that effect is unlikely to apply to the super-rich favored by Cain and Perry. Higher income tax rates do produce modest decreases in taxable income, but mainly because higher-income taxpayers work harder to avoid taxes, which is welfare-destroying. (See Saez, Slemrod, and Giertz 2010, forthcoming in the JEL.)
What about taxes on investment income, which George W. Bush reduced to 15 percent and Cain and Perry want to reduce to zero? Again, it's not clear these taxes have any impact on economic growth. Since 1947, GDP growth has averaged 3.0 percent in high-tax years (top capital gains rate over 25 percent) and 2.7 percent in low-tax years (top capital gains below 25 percent).
This shouldn't be surprising, either. In theory, lower capital gains taxes encourage people to save more. More savings means more capital available for businesses to invest. In practice, though, cutting taxes on investment income just increases the federal budget deficit, which means the government is saving less, and reduced government saving more than cancels out any increase in private saving. As a result, total national saving--the only thing that matters--goes down.
Cain and Perry's claim that huge tax breaks drive economic growth has been disproved by just about every aspect of recent history. Then again, Cain and Perry aren't looking for history to endorse them. They're looking for deep pockets.
