#5: Relationship Between Tax Rates and Productivity
The M & M: Periods in U.S. history during which high-income individuals were taxed at relatively low tax rates are marked by higher rates of economic productivity than are periods when the top tax rates on individuals were relatively high.
Productivity as used here refers to the amount produced by the private workforce for each hour worked. When productivity increases, more items are manufactured per hour than were manufactured before; and this will contribute to increased business profits and increased rates of economic growth.
Wrong! There is no historical evidence that any such pattern occurs. In fact, as you will see from the graph below, quite the opposite is often true: Periods when top tax rates have been very high have experienced high levels of productivity, and periods when top tax rates have been much lower have experienced lower levels of productivity.
| 1951-1963 | 1964-1980 | 1981-1986 | 1987-1997 | 1998-2007 | |
| Top average tax rate | 91.2% | 71.2% | 50.0% | 34.8% | 38.0% |
| Average annual productivity growth rate | 3.0% | 2.3% | 1.9% | 1.0% | 2.9% |
What do these figures really mean? No one really believes that very high marginal tax rates yield greater productivity. Instead, individual income tax rates are but one of many complicated factors--tax and non-tax--that bear upon productivity. Yes, you can associate periods of high productivity with periods of low tax rates but also with periods of high tax rates.
And I know you're wondering: What about the impact of the Bush tax cuts in 2001 (that gradually lowered the top tax rate from 39.65% to 37.6% by 2004 and to 35.0% by 2006), along with the tax cuts in 2003 (that lowered the top rate on dividends and capital gains to 15%,) all of which the Bush administration claimed would stimulate economic productivity? For the period from 2004 through 2007, the average top tax rate was 36.3% (ignoring the rate cuts for dividends and capital gains), a small fraction of the top rates for the period 1951 to 1980; yet the average productivity gain was 1.9%, considerably less than the average gains during those earlier years.
The lesson: Beware of statements that cutting taxes will guarantee stronger, long-term economic growth.
For statistics, see Joel B. Slemrod and Jon Bakija, Taxing Ourselves, 2nd ed. Cambridge: MIT, 2000, 97; and "News," Bureau of Labor Statistics, U.S. Department of Labor, February 6, 2008.