A recent Wall St. Journal op-ed by economists Peter Diamond and Emmanuel Saez makes a fascinating observation. If you actually look at the facts, higher taxes do not slow economic growth. In the United States, for instance, we grew faster with higher taxes than with lower taxes. As Diamond and Saez explain:
But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. Indeed, according to the U.S. Department of Commerce's Bureau of Economic Analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68% between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23% between 1950 and 1980 when top tax rates were at or above 70%.
Neither does international evidence support a case for lower growth from higher top taxes. There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries.
For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.
In America we use a mix of public and private means to steer our resources to everything from buying homes to building schools to researching the next great technological breakthrough. We grow the fastest when we make the wisest investments, those that make us more educated, sophisticated, and productive. Yet some of these investments, like education, research, and infrastructure, have been neglected in the rush to cut taxes at all cost. These are investments that we can’t make on our own: we must pool together to make them, and when we don’t, America doesn’t grow as fast.
Raising taxes on the wealthy at the margins may make them wait a year before buying that new BMW, but using those dollars to invent the next internet will benefit America much more than having a few more 2012 7 Series on the road. In sum, it’s a matter of putting America’s resources to their best use, and taxes are one way we as a people do that.