Laffer Curve and Marginal Tax Rate

Interesting article on the Laffer Curve and what the optimal tax rate should be. Most of the comments against a high marginal tax rate speak to longevity for GDP growth. Lucky for me, I found some great data today on the top marginal tax rates and GDP growth vs previous year. Year to year growth is somewhat random, and since we're talking about maintaining growth, that implied using a moving average. I examined both a 5 year moving average and a 15 year moving average. I placed the moving average on the graph both at the time it is calculated, and also offset by the length of the average. For the offset case, the marginal tax rate of 1920 would correspond to the gdp growth moving average calculated in 1935. 1940 with 1955, etc. And now for the charts.

5 Year MA, GDP vs Marginal Tax Rate

The five year MA is relatively uninteresting. The only period with any real information is during the great depression. Increasing the marginal tax rate produced gdp growth over a 5 year period, with GDP finally collapsing around World War II (Some other day I'll post the charts that show war effect on GDP growth). Once the war end, GDP fluctuated, with increases in tax rates seeming to sustain GDP growth for about 10-15 years.

15 Year MA, GDP vs Marginal Tax Rate

Now this is where it gets interesting. Increasing the marginal tax rate produces increases in GDP growth, up to about 70% (as verified by tax theoreticians). Above that will cause GDP growth to stall out (WWII doesn't help either). A reduction from 95 to 92% along with post war efforts caused an increase in GDP growth which was sustained until the marginal tax rate was lowered to 70%. GDP growth then fell off and fluctuated around 3% until taxes were lowered. Taxes lowered boosted GDP growth for about a year. After that GDP growth continued its decline, until taxes were raised, providing a minimal boost.

The easiest conclusion to draw is that for sustained GDP growth, high marginal tax rates (50-70%) are optimal. Low marginal tax rates would boost GDP growth for short periods, but overall result in declines to GDP growth.

Let me know if you see any trends that I missed. Even with a 15 year MA, it's still a noisy data set.