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With a net worth in the neighborhood of $80 billion, Microsoft co-founder Bill Gates has no hesitation answering questions about what sort of economic policies the country should follow. When he was asked this Sunday how he’d respond to those who think cuts in taxes and regulations will unleash productivity, Gates criticized the notion.
"The highest economic growth decade was the 1960s. Income tax rates were 90 percent," he said on CNN’s Fareed Zakaria GPS May 17, 2015. "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."
Gates was making the point that low tax rates do not necessarily lead to economic prosperity. To do so, he mentioned a time when high growth and high marginal tax rates co-existed. Marginal tax rates are tax rates applied to each bracket of income. The more money people make, the higher their marginal tax rates, and the people with the highest income pay the top rate.
We decided to check Gate’s statement about growth and personal income taxes in the 1960s.
The man who helped revolutionized personal computing is for the most part correct.
Using inflation-corrected rates of growth in Gross Domestic Product from the government’s Bureau of Economic Analysis, the 1960s tops the decades of the post-World War II era. We lined those up with the highest marginal tax rates on the IRS website. Here’s what we found:
90+ then 70-77
50 then 38.5 then 28
31 then 39.6
38.6 then 35
(Note: In some cases, the highest marginal tax rate changed during the decade.)
While GDP growth varied year-to-year, the 1960s saw the greatest average growth by decade.
But that growth didn’t line up with a top tax rate of 90 percent in every year. For the first four years of the 1960s, individuals faced a top tax rate of 91 percent on each dollar over the $400,000 mark. In 1964, the top rate dropped to 77 percent, followed by another decline to 70 percent (this time on every dollar over $200,000.) By the end of the decade, it inched back up to 77 percent.
So the top tax rate wasn’t always 90 percent throughout the 1960s, as one hearing Gates’ claim might think. And like today, there were tax breaks and deductions that would lower someone's effective tax rate -- or what they actually pay.
No end to this debate
Gates’ point was that lowering tax rates does not, by itself, create a more prosperous economy. But the reverse also must be said: Higher tax rates don’t mean a booming economy. In fact, many factors drive the economy, from energy prices and global competition, to interest rates and government spending.
A more sober analysis comes from William Gale at the Brookings Institution and Andrew Samwick at Dartmouth College and the National Bureau of Economic Analysis. In a 2014 article, the two economists found that "U.S. historical data show huge shifts in taxes with virtually no observable shift in growth rates."
One of the complicating factors in drawing firm conclusions is that tax cuts often come as part of a larger package of changes which makes it tougher to tease out the impact of each policy shift. To further muddy the waters, the rest of the world doesn’t conveniently stand still to let America’s fiscal policy experiments play out in peace and quiet. If China tweaks the value of its currency, or South America has a banking crisis, that affects international capital markets, American trade and thus American growth.
Another problem is the timing of spending cuts to offset tax cuts. Gale and Samwick concluded that the failure to cut "unproductive" spending at the same time that tax rates are reduced undermines any positive effect of the tax cuts.
But there are studies that reach other conclusions. Two economists at the University of California-Berkeley, Christina Romer and Dave Romer, broke down tax changes based on the driving purpose behind them. For example, it is very different if taxes were cut because the economy hit the skids, rather than wanting to shrink the size of government by curtailing revenues. Romer and Romer -- they’re married -- figured that separating the reasons for tax changes allowed them to factor in a number of outside conditions that determined the impact of the policy shifts.
Their key finding?
"Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent," they wrote. (Christina Romer is former chair of President Barack Obama’s Council of Economic Advisers.)
So there you have it. Some economists find no real link between tax shifts and economic activity. Some find a direct link. Add to this the debate over different kinds of taxes, such as capital gains and corporate tax rates, and it’s clear why there are so many differing perspectives.
For the record, Gates himself favors a shift to taxing consumption rather than labor and income. We reached out to Gates through his foundation but did not immediately hear back.
Gates said that in the 1960s, high taxes, 90 percent, and high economic growth came at the same time. The underlying reasons are complicated, but the numbers largely bear out. On average, annual growth was about 4.3 percent for the decade, higher than any other post-World War II period. Gates was a bit off in talking about a 90 percent tax rate. During the 1960s, the marginal rate fell for a time to 70 percent.
Gates did not go so far as to say that higher taxes bring higher growth. And for good reason. The connection between taxes and growth is quite tricky.
We rate this claim Mostly True.
CNN, Fareed Zakaria GPS, May 17, 2015
Bureau of Economic Analysis, GDP percent change from preceding period, 1930-2014
Brookings Institution, Effects of Income Tax Changes on Economic Growth, September 2014
American Economic Review, The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, June 2010
Gatesnotes, Why Inequality Matters, Oct. 13, 2014
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