By David Henderson
Bill Gates stated yesterday:
The highest economic growth decade was the 1960s. Income tax rates were 90 percent.
He stated this on CNN’s Fareed Zakaria GPS.
Politifact’s Punditfact decided to check the truth of Gates’s statement. To their credit, they did point out that for the last 6 years of the 1960s, the top tax rate was not 90 percent. Instead it ranged between 70 percent and 77 percent.
Also, to their credit, Punditfact briefly covers the controversy about the connection between tax rates and economic growth. Here’s the skeptical quote about tax cuts:
A more sober analysis comes from William Gale at the Brookings Institution and Andrew Samwick at Dartmouth College and the National Bureau of Economic Analysis. In a 2014 article, the two economists found that “U.S. historical data show huge shifts in taxes with virtually no observable shift in growth rates.”
Punditfact also gives the “other side:”
But there are studies that reach other conclusions. Two economists at the University of California-Berkeley, Christina Romer and Dave Romer, broke down tax changes based on the driving purpose behind them. For example, it is very different if taxes were cut because the economy hit the skids, rather than wanting to shrink the size of government by curtailing revenues. Romer and Romer — they’re married — figured that separating the reasons for tax changes allowed them to factor in a number of outside conditions that determined the impact of the policy shifts.
Their key finding?
“Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent,” they wrote. (Christina Romer is former chair of President Barack Obama’s Council of Economic Advisers.)
Punditfact’s conclusion, which they label “Our Ruling”:
Gates said that in the 1960s, high taxes, 90 percent, and high economic growth came at the same time. The underlying reasons are complicated, but the numbers largely bear out. On average, annual growth was about 4.3 percent for the decade, higher than any other post-World War II period. Gates was a bit off in talking about a 90 percent tax rate. During the 1960s, the marginal rate fell for a time to 70 percent.
Gates did not go so far as to say that higher taxes bring higher growth. And for good reason. The connection between taxes and growth is quite tricky.
We rate this claim Mostly True.
Punditfact bothered to check average growth rates of GDP by decade. Punditfact also checked top tax rates during the 1960s and found the split noted above. They found Gates’s claim about tax rates being 90 percent in the 1960s to be false (if I were to put in in their terms, I would say “Mostly False” because tax rates were below 90 percent for over half the decade.)
But then that raises an obvious point that inquiring minds would want to know. Given that top tax rates were substantially lower in the last 6 years of the 1960s than in the first 4 years, was there a difference in the growth rate of real GDP?
Here are the growth rates of real GDP from 1960 to 1963, the 4 years in the 1960s when the top tax rate was 91 percent:
Average growth rate (arithmetic, not geometric): 3.825 percent.
Average growth rate (geometric): 3.8 percent.
Average growth rate (arithmetic, not geometric): 4.8 percent.
Average growth rate (geometric): 4.8 percent.
In other words, the annual growth rate averaged a whopping one percentage point higher during the six years of the decade that had top tax rates substantially below 91 percent.
But you read that here, not at Punditfact.