Do Tax Cuts Lead To Economic Growth?

The short answer appears to be...sometimes, but not as often as you'd think. The long answer is more complex, and more interesting, especially in the context of an election campaign in which tax cuts are claimed to be either the ambrosia our $14 trillion economy is lacking or a useless pander to millionaires and billionaires.

The chart outlines the relationship between tax cuts and the annual growth rate of GDP, starting in 1987. The steep upward, then downward trajectories of the graph appear to be screaming that tax rates and the GDP growth rate actually have a directly proportional relationship, instead of the inversely proportional relationship that seems to be more logical (and is posited ad nauseum every presidential race. To boost job growth, I'll cut taxes! To cut the deficit, I'll cut taxes! To cure cancer, I'll cut taxes!). Yet the data doesn't support the conventional wisdom, of tax cuts corresponding to quick and guaranteed economic growth.

In reality, after tax hikes in both 1990 and 1993, growth rates went up, while after the twin Bush tax cuts of '01 and '03, growth rates crashed spectacularly.

Of course, the top marginal tax rates in the '50s and '60s were north of 90% for a time, and were systematically lowered over time and were greeted by a generally steadily increasing rate of GDP growth. Perhaps these boom years are responsible for the unshakeable dogma that tax cuts, no matter what, will lead America out of the economic wilderness and straight to the oasis of GDP growth.

From the article I link to above:

The defining economic policy of the last decade, of course, was the Bush tax cuts. President George W. Bush and Congress, including Mr. Ryan, passed a large tax cut in 2001, sped up its implementation in 2003 and predicted that prosperity would follow.

The economic growth that actually followed — indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism. Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression. 

So why didn't these tax cuts lead to boom times like the people in charge predicted? Who knows. History's largest economy can be fickle like that. Should even more tax cuts be a presidency-winning campaign argument, if they come along with 12 million jobs over the next 8 years? If you believe that, I've got some magic weight loss pills to sell you...



Ben Stein cleared up his dry eyes long enough to go on Fox & Friends and speak some sense to the crazies. Notable quote from the Reagan-era speechwriter:

"I do not think they just have a spending problem. I think they also have a too-low taxes problem. And while all due respect to Fox, whom I love like brothers and sisters, the taxes are too low."