Monday, April 18, 2011

The Republican cut-the-tax-rate lie

If you cut the top tax rate, say the Republicans, you get economic growth, you’ll get middle class income growth, hourly wages will go up, and, most importantly, jobs will be created and the unemployment rate will plummet.  In other words, cut the top rate so that the rich are taxed less and all good things will happen.

But, is it true.  Suppose someone actually looked at the impact of changes in the top tax rate on economic growth, income growth, growth in hourly wages, and changes in unemployment.  What do you think they would find?  Would the Republicans be proven right? 

Well, someone did look at the historical record.  Here is what they found.

The correlation between top tax rate cuts and real GDP growth is 0.3.  What that means is that there is NO correlation.  If GDP grew when top rates were cut the correlation would be -1.0 or something close to that.  Verdict:  Cutting the top tax rate doesn’t have any impact on economic growth.  Nothing at all. 

What about median income growth?  Does cutting the top tax rate help?  Nope, the correlation is even weaker at 0.06%.

What about growth in hourly wages?  Again, nothing at all.  Correlation this time is 0.34.

Finally, what about all those jobs rich people create when they don’t have to pay high taxes?  Does cutting the top tax rate result in a reduction in unemployment?  Again, no.  The correlation is just 0.22.

So, there you have it.  Cutting the top marginal rate doesn’t do anything at all to stimulate economic growth, increase income or hourly wages OR create jobs. 

So, what does cutting the top marginal rate do?  It makes rich people richer.  That correlation is a perfect 1.0.

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