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GDP vs Top Tax Rate & Capital Gains from 1984

The chart shows the linear correlation of the top marginal tax rate and the capital gains tax rate with growth since 1984.

The top tax rate has its best correlation leading growth 2 years. The capital gains tax rate has the best fit leading 5 years.

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.

In this chart every tax cut corresponds to the economy weakening after the respective time lag. Every tax increase corresponds with stronger growth.

Using these lead times the last two tax cuts to improve growth were cutting the capital gains rate from 39.9% to 28% in 1979 and cutting the top rate to 50% in 1982. Both of these cuts benefited growth in 1984 the first year in the chart.

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. In the period preceding 1984 marginal tax rates may have been high enough to interfere with the average tax rate being low.