Whenever there is the slightest proposal to raise the top marginal tax rate on those with very high incomes, such as the one being floated of 70 percent tax rate for earnings more than $10 million in a single year, there is a cry that the increase will hurt the nation’s economy. The problem with this assertion is if one looks at history the assertion fails. History tells us what effect a high top marginal tax rate has on the economy. From 1951 through 1963, when the top marginal tax rate varied between 91 percent and 92 percent, the GDP grew on average 3.61 percent a year. Real GDP is, by definition, a measure of the income per person adjusted for inflation. So over a decade of very high top marginal tax rates the economy grew.
In fact, when President Reagan lowered the top marginal tax rate to 28 percent the average growth rate between 1979 and 1989 was 3.27 percent. This economic growth of 3.27 percent was less than what it was from 1951 to 1963 when the top marginal tax rate was between 91 percent and 92 percent. Then President Clinton raised the top marginal tax rate from President Reagan’s 28 percent to nearly 40 percent. The average growth rate between 1989 and 1999 was 3.64 percent, again higher than when the top marginal tax rate was lower.
The almost blind loyalty to the belief that “lower taxes lead to economic growth, higher taxes lead to economic shrinking” is misplaced. It might be true for low tax rates on the middle class but not for those with very high yearly incomes. History shows that high top marginal tax rates on those with very high yearly incomes does not lead to economic shrinking. In fact, history shows robust economies during periods of high top marginal tax rates. The Chicken Little cry that the economic sky will fall if the top marginal tax rate is raised is just that, a baseless cry. And the extra tax monies could be used for the good of the nation as it was during the 1950s when it was used to build the interstate system.
Sister Bay, Wis.