Debunking Income Tax Myths

Today I was looking around Facebook when I came across a article from entitled Bill Gates: Tax Reductions ‘Nonsense,’ Economic Growth Best When Corporate Tax Rates Are High – VIDEO Written by Rowan Lee. Multiple errors made and I’m here to correct them.

Mr. Lee starts off with the following quote by Bill Gates

“The highest economic growth decade was the 1960s. Income tax rates were 90 percent…I mean, the idea that there’s some direct connection that all these innovators are on strike because tax rates are at 35 percent on corporations, that’s just such nonsense.”

Followed by

Gates calls nonsense, claiming instead that high taxes have led to the most national productivity – and he is absolutely correct. The 1960’s top the post World War II era in terms of GDP – when tax rates on the wealthiest were at 90%.

This is a basic error confusing marginal and effective tax rates. Mr. Gates is using the marginal tax rate but this completely ignores deductions, credits and such. Instead of a 90% rate we actually see a rate that does not go over 30%. While the top effective rate is down as of 2012 is was still in the 20%-30% zone. As noted on BeingClasicallyLiberal.Liberty.Me “That doesn’t even mean that rich people pay 30% of their income to the government, only that 30% of their income goes to the government after they earned a certain amount of money. Currently, the first $400,000 a person earns is subject to lower tax rates. The top marginal tax rate only applies to a person’s income after they earn $400,000. In the past, one had to be a multimillionaire in order for his income to face the top tax rate. For example, in 1936 one had to earn over $80 million (adjusted for inflation) for his/her income to be subject to the top tax rate. Thus, comparing top tax rates over time is utterly nonsensical.”

Compared to the past 15 years, where taxes on the wealthy have stagnated at 35-38%, leading to a GDP growth of 1.72% – in the 1960’s that growth rate boomed to 4.36% GDP growth.

As poorer economy’s grow faster than richer ones, as the US economy is now richer we should see slower growth.

Finnaly this claim was made

High taxes may not always lead to growth, but low taxes never do.

As economists Christina and David Romer (both Keynesian) found “[T]ax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment…we find that a tax increase of one percent of GDP lowers GDP by about 3 percent.”

As the Brookings Institute found “cuts in income tax rates that are financed by spending cuts can have positive impacts on growth”. Research from the ECB finds that “Using annual data from 1965 to 2007 for a panel of twenty-six economies, the results show that the effect of an increase in taxes on real GDP per capita is negative and persistent: an increase in the total tax rate (measures as the total tax ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5% to –1%.”

Finally economists from Denmark found that “Our results indicate that along the intensive margin the Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in total income. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States.”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s