Call Today: 806-226-5611

← Back to Charts

GDP vs Top Tax Rate & Capital Gains from 1968

The top marginal tax rate and the capital gains tax rate appear to have leading curvilinear relationships with annual GDP growth since 1968. The correlations are shown as a scatter plot and a time-series.

The top tax rate has its best correlation leading growth 2 years. The best curvilinear fit in the scatter plot suggests the growth maximizing Top tax rate is 54%. The strongest year of growth in the graph,1984, corresponds with a 50% top rate. The curvilinear fit is used to estimate the influence of the top rate on growth for each year. This is shown in the time-series plot on the right.

The capital gains tax rate leads growth by 5 years. The best curvilinear fit in the scatter plot suggests a capital gains rate of 29.1% maximizes growth. Growth in 1984 corresponds to a 28% capital gains rate. The great recession corresponds with the 15% rate. The deep recession of 1981-1982 correlates with a 39.9% capital gains rate.

The influences on growth of the two tax rates shown in green and blue are combined into a model shown in red. The chart also graphs the 5 year rate of GDP growth and the estimate of the 5 year rate based on the two tax rates.

These correlations may support the premise that robust growth benefits from a low average tax rate with a high marginal rate. If marginal tax rates are high the wealthy will avoid taxation. If the average tax rate is also low enough the preferred way to avoid taxation is to build value in a business where expenditures on wages, equipment, marketing etc. are deductible or depreciable. If marginal tax rates are too high it interferes with the average tax rate being low enough.

Looking at growth prior to 1968 may benefit from examining tax brackets. The level of the top bracket influences growth and when high enough may result in growth maximizing tax rates than shown here.