Prior to the Reagan tax cuts the U.S. economy grew from 1947-1981 at an average annual rate of 3.64%. After the Reagan tax cuts the U.S. economy grew from 1982-2010 at an average annual rate of 2.95%. The data gets even worse for the fans of tax cuts for the rich when you consider that in 1999 the Boskin Commission changed how the CPI was calculated, adding geometric weighting that lowered the CPI and thus lowered the GDP deflator by an estimated 1.1-1.3% per year. With this fact considered, the period from 1999-2010 that is reported at 1.89%, is really 0.59-0.79% when fitted to compare with the rest of the 1947 and onward data. This lowers the 1982-2010 average to 2.51-2.58%, more than a full point less than the growth rate before the Reagan tax cuts.
Compounded over the course of 30 years, today’s economy would be 37% larger had it continued to grow at the previous growth rate.
Why would the economy grow faster under higher top marginal tax rates than under lower top marginal tax rates? In other words, why does the history conflict with what most every Republican wants you to believe? It is because of how taxes on net earnings work. If you are the owner-operator of a business, and are faced with taking personal income that will be taxed at 70%, or reinvesting that money back into your company where it won’t be taxed at all, there is a compelling case to reinvest the money. Under high marginal tax rates for extremely high incomes, more profits are reinvested, as opposed to taken out for the personal consumption of the owner operator. It is a trade off between growing the business, or growing the owner’s exotic car collection. For a bit more on this see the Bush Tax Cut Logical Fallacies and Taxing Profits Vs. Taxing Costs.
From 1936 until 1982, the top marginal tax rate in the U.S. ran from a low of 70% to a high of 94%, and stayed over 90% from 1944-1963. Top marginal rates substantially less than 50% are a relatively recent invention for the modern era. The data doesn’t support that they correlate with higher growth however.
The purpose of 70-94% top marginal rates was not to raise revenue, and it was not to fund a welfare state. These rates started at incomes equivalent to over half a million dollars a year in today’s dollars, and only applied to a small fraction of the top 1%. Both of the major entitlement programs of the 20th Century had their own dedicated regressive funding through the payroll tax. The purpose of these rates was to limit the growth and compounding of aristocracy. It was to guard against the rise of a class that could challenge or control the federal government. These are not my ideas, they are Jefferson’s (pages 49-51 of the Jeffersonian Cyclopedia):
"I hope that we crush...in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country."
"An industrious farmer occupies a more dignified place in the scale of beings, whether moral or political, than a lazy lounger, valuing himself on his family, too proud to work, and drawing out a miserable existence by eating on that surplus of other men's labor, which is the sacred fund of the helpless poor."
"An aristocracy of wealth is of more harm and danger than benefit to society."
"There is a natural aristocracy among men. The grounds of this are virtue and talents…There is also an artificial aristocracy, founded on wealth and birth, without either virtue or talents. Natural aristocracy I consider the most precious gift of nature. The artificial aristocracy is a mischievous ingredient in government, and provision should be made to prevent its ascendency."-Jefferson in an 1813 letter to Adams
Jefferson also clearly advocates progressive taxes that exempt a certain basic allowance for living, and “geometrically progress” from there:
"Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise."
"We are all the more reconciled to the tax on importations, because it falls exclusively on the rich, and with the equal partition of intestate's estates, constitutes the best agrarian law..the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone, without his being called on to spare a cent from his earnings"
"Taxes should be proportioned to what may be annually spared by the individual."
Adam Smith best framed the argument for progressive taxes with his explanation of government’s most basic function:
"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all."-Adam Smith, The Wealth of Nations
Smith also supported progressive taxes:
"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more."
Smith also had some distinctly anti-corporatist remarks when he explained that profit is an inverse function of competition:
"the rate of profit does not rise with the prosperity, and fall with the declension of the society. ON the contrary, it is naturally LOW IN THE RICH, and HIGH IN THE POOR countries, and it is ALWAYS HIGHEST IN THE COUNTRIES WHICH ARE GOING FASTEST TO RUIN."
Jean Baptiste Say, Smith’s successor, whom Jefferson was perhaps an even greater fan of than Smith (calling Smith's book "able and the first degree of merit, yet prolix and tedious" and refers to Say's work as adding "considerable advances in correctness and extension of principles within half the volume of Smith's work.") most clearly supported progressive taxes in his A Treatise on Political Economy:
"A tax merely proportionate to individual income would be far from equitable; and this is probably what Smith meant, by declaring it reasonable, that the rich should contribute to the public expenses, not merely in proportion to the amount of his revenue, but even somewhat more. I have no hesitation in going further, and saying, that taxation can not be equitable, unless its ratio is progressive.”
Tax cuts for the super rich only help the super rich. 63 years of data show it. The case gets even stronger when you start breaking it down into quintiles and considering the gini curve and unemployment. There was an explosion in the income of the top tenth of a percent that coincided with the cut in the top marginal rates, and the slow down in total GDP growth. See figure 2 and 3 on pages 14 and 16. The total share of wealth held by the top 1% has expanded, while the share of wealth held by everyone else has shrank, starting with the 1980 break line. See figure 5. The top 1%’s share of total national income grew from 12.8% in 1982 to 21.3% in 2006 at the same time the bottom 80%’s share fell from 48.1% to 38.6%. See table 6.
The Boskin Commission changes also mean there was essentially ZERO real growth for the decade of the Bush tax cuts, at 0.59-0.79%, it didn’t even keep up with the population growth rate of roughly 1%, on a per capita basis we got poorer.
There's a huge difference between paying taxes to support a king, vs. paying taxes to provide for the public good through schools and infrastructure. Men like Smith and Jefferson understood this. Capitalism as put forth in The Wealth was revolutionary because for the first time ever it suggested that it was not the living conditions of the noble or merchant classes that was of utmost importance, it was the living conditions of everyone else that created the wealth of the nation. It was not how much gold the sovereign had amassed in its coffers to buy an insta-army, it was the real wages of the average worker. It is an ideology that is pro-market, and pro-worker, while being distinctly anti-nobility, anti-aristocracy, and anti-corporation.
Tax cuts that are aimed exclusively at the super-rich are inconsistent with our nation’s founding principles. The truth is that what most Republicans advocate, be it through the Ryan plan, or the Fair Tax, or the recently published Heritage report, is actually far more in-line with the pre-1776 world, than it is with the post-1776 world.
GDP Growth Rate Sources (pardon the Wikipedia citing, but they had the best graphs):
1947-1973 average growth rate 3.99%http://en.wikipedia.org/wiki/File:Contributions_to_Percent_Change_in_Real_GDP_(the_US_1947-1973).png
1974-1990 average growth rate 3.15% http://en.wikipedia.org/wiki/File:Contributions_to_Percent_Change_in_Real_GDP_(the_US_1974-1990).png
Reagan years average, 1980-1988 3.37%
1991-2010 averages 2.68% http://en.wikipedia.org/wiki/File:Contributions_to_Percent_Change_in_Real_GDP_(the_US_1991-).png
Plug in any two years and calculate an average annual growth rate, http://www.measuringworth.com/growth/ I spot checked several data points and this appears to be generating accurate answers.