When Higher Marginal Tax Rates Helped The Economy: Professor Paleveda’s Paradox

Abstract

Higher Marginal Tax rates in many cases have actually helped the economy. The boom after WWII saw marginal rates as high as 91%. The Clinton administration increased taxes to 39% and the economy took off. When the Bush administration lowered the tax to 35%, the economy sank and deficits took off. This paper explores the factual data behind marginal tax rates and the optimal marginal tax rate. Historically, the S P 500 data and the marginal tax rate data is available and presented in the paper. Although there is a correlation between marginal tax rates and the economy, it is not necessarily true that a lower marginal tax rate will produce an expanding economy. Data suggest an optimal rate at about 40%.