GDP growth rates:
Pre-Reagan tax cuts vs. post-Reagan tax cuts

Prior to the Reagan tax cuts, the U.S. economy grew at an average annual rate of 3.64% from 1947 to 1981. After the Reagan tax cuts, from 1982 to 2010, the U.S. economy grew at an average annual rate of 2.95%. For the fans of tax cuts for the rich, the data get even worse when you consider that in 1999 the Boskin Commission changed how the CPI was calculated, adding geometric weighting that lowered the CPI and thus lowered the GDP deflator by an estimated 1.1-1.3% per year. With this fact considered, the period from 1999 to 2010 that is reported at 1.89% is really 0.59-0.79% when fitted to compare with the rest of the 1947 and onward data. This lowers the 1982-2010 average to 2.51-2.58%, more than a full point less than the growth rate before the Reagan tax cuts.

Compounded over the course of 30 years, today’s economy would be 37% larger had it continued to grow at the previous growth rate.

Why would the economy grow faster under higher top marginal tax rates than under lower top marginal tax rates? In other words, why does the history conflict with what most every Republican wants you to believe? It is because of how taxes on net earnings work. If you are the owner-operator of a business and are faced with taking personal income that will be taxed at 70%, or with reinvesting that money back into your company where it won’t be taxed at all, there is a compelling case to reinvest the money. Under high marginal tax rates for extremely high incomes, more profits are reinvested, as opposed to taken out for the personal consumption of the owner operator. It is a trade off between growing the business, or growing the owner’s exotic car collection. For a bit more on this see the Bush Tax Cut Logical Fallacies (Dec. 2010) and Taxing Profits vs. Taxing Costs (Mar. 2011).

From 1936 until 1982, the top marginal tax rate in the U.S. ran from a low of 70% to a high of 94%. It stayed over 90% from 1944 to 1963. Top marginal rates substantially less than 50% are a relatively recent invention for the modern era. However, the data do not support that they correlate with higher growth.

The purpose of 70-94% top marginal rates was not to raise revenue, and it was not to fund a welfare state. These rates started at incomes equivalent to over half-a-million dollars a year in today’s dollars, and the rates applied to only a small fraction of the top 1%. Both of the major entitlement programs of the 20th Century had their own dedicated regressive funding through the payroll tax. The purpose of these rates was to limit the growth and compounding of aristocracy. It was to guard against the rise of a class that could challenge or control the federal government. These are not my ideas; they are Jefferson’s, as found in The Jeffersonian Cyclopedia:

I hope that we crush ... in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country.
-- to George Logan, 1816; found at page 49

An industrious farmer occupies a more dignified place in the scale of beings, whether moral or political, than a lazy lounger, valuing himself on his family, too proud to work, and drawing out a miserable existence by eating on that surplus of other men's labor, which is the sacred fund of the helpless poor.
-- to M. de Meunier, 1786; found at page 49

An aristocracy of wealth [is] of more harm and danger than benefit to society.
-- from Jefferson's autobiography

There is a natural aristocracy among men. The grounds of this are virtue and talents. ... There is, also, an artificial aristocracy, founded on wealth and birth, without either virtue or talents. ... The natural aristocracy I consider the most precious gift of nature. ... The artificial aristocracy is a mischievous ingredient in government, and provision should be made to prevent its ascendency.
-- to John Adams, 1813; found at page 48

Jefferson also clearly advocated for progressive taxes that would exempt a certain basic allowance for living and would “geometrically progress” from there:

Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.
-- to the Rev. James Madison, 1785; found at page 727

The rich alone use imported articles, and on these alone the whole taxes of the General Government are levied. The poor man, who uses nothing but what is made in his own farm or family, or within his own country, pays not a farthing of tax to the General Government, but on his salt. ... Our revenues liberated by the discharge of the public debt, ... the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone, without his being called on to spare a cent from his earnings.
-- to General Kosciusko, 1811; found at page 849

And,

Taxes should be proportioned to what may be annually spared by the individual.
-- to James Madison, 1784; found at page 858

Adam Smith best framed the argument for progressive taxes with his explanation of government’s most basic function:

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.
-- Adam Smith, The Wealth of Nations

Smith also supported progressive taxes:

It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more.

And Smith had some distinctly anti-corporatist remarks when he explained that profit is an inverse function of competition:

The rate of profit does not rise with the prosperity, and fall with the declension of the society. ON the contrary, it is naturally LOW IN THE RICH, and HIGH IN THE POOR countries, and it is ALWAYS HIGHEST IN THE COUNTRIES WHICH ARE GOING FASTEST TO RUIN.

Jean Baptiste Say, Smith’s successor, most clearly supported progressive taxes in his A Treatise on Political Economy. (Jefferson was perhaps an even greater fan of Say than of Smith. Jefferson called Smith's book "able and the first degree of merit, yet prolix and tedious," and he referred to Say's work as adding "considerable advances in correctness and extension of principles within half the volume of Smith's work."):

A tax merely proportionate to individual income would be far from equitable; and this is probably what Smith meant, by declaring it reasonable, that the rich should contribute to the public expenses, not merely in proportion to the amount of his revenue, but even somewhat more. I have no hesitation in going further, and saying, that taxation can not be equitable, unless its ratio is progressive.

Tax cuts for the super rich help only the super rich. Sixty-three years of data show that truth. The case gets even stronger when you start breaking it down into quintiles and considering the gini curve and unemployment. There was an explosion in the income of the top tenth of a percent that coincided with the cut in the top marginal rates, and the slow down in total GDP growth. See figure 2 and 3 on pages 14 and 16. The total share of wealth held by the top 1% has expanded, while the share of wealth held by everyone else has shrunk, starting with the 1980 break line. See figure 5.  The top 1%’s share of total national income grew from 12.8% in 1982 to 21.3% in 2006 at the same time the bottom 80%’s share fell from 48.1% to 38.6%. See table 6.

The Boskin Commission changes also mean there was essentially ZERO real growth for the decade of the Bush tax cuts. At 0.59-0.79%, it didn’t even keep up with the population growth rate of roughly 1%; on a per capita basis, we got poorer.

There's a vast difference between paying taxes to support a king and paying taxes to provide for the public good through schools and infrastructure. Men like Smith and Jefferson understood this. Capitalism as put forth in The Wealth of Nations was revolutionary because, for the first time ever, it was suggested that it was not the living conditions of the noble or merchant classes that was of utmost importance; rather, it was the living conditions of everyone else who created the wealth of the nation. It was not how much gold the sovereign had amassed in its coffers to buy an insta-army that was important; rather, it was the real wages of the average worker that was important. It is an ideology that is pro-market, and pro-worker, while being distinctly anti-nobility, anti-aristocracy, and anti-corporation.

Tax cuts that are aimed exclusively at the super-rich are inconsistent with our nation’s founding principles. The truth is that what most Republicans advocate -- be it through the Ryan plan, or the Fair Tax, or the recently published Heritage report -- is actually far more in-line with the pre-1776 world than with the post-1776 world.

GDP Growth Rate Sources:
(Pardon the Wikipedia citing, but they have the best graphs. Their source is the Bureau of Economic Analysis.)

1947-1973 average growth rate of 3.99%
Contributions to Percent Change in Real GDP (US 1947-1973)

1974-1990 average growth rate of 3.15%
Contributions to Percent Change in Real GDP (US 1974-1990)

1980-1988 average growth rate of 3.37% (the Reagan years)

1991-2010 averages of 2.68%
Contributions to Percent Change in Real GDP (US 1991- )

Plug in any two years and calculate an average annual growth rate, measuringworth.com/growth/. I spot checked several data points, and this appears to be generating accurate answers.

-- Also at my Seeking Alpha blog --

June 3, 2011

In-state tuition for illegal immigrants
helps Maryland's budget

What is the marginal cost of admitting one more student to the University of Maryland? Is UMD building any new buildings for that one student? No. Are they maintaining any new landscaped grounds? No. Are they hiring a new $3M/yr basketball coach? No. Are they even hiring any new professors? Not many.

Now, what about with a 3% increase in new students? Many university costs would still remain fixed (i.e. unchanged) within that small of an increase. It is only the costs that would actually increase (the variable or marginal costs) that would impact the state’s budget or total university subsidy.

Illegal immigrants represent about 3% of the population, so even if the Maryland Dream Act resulted in a student enrollment influx proportional to their share of the population, you're talking a 3% increase in new students. Consider, however, that due to lower incomes and second language barriers, this is an underrepresented group in college attendance, so the reality is that we are talking about a figure less than 3%.

So the question is this: Would a 3% (or less) increase in enrollment times the instate tuition rate be equal to, less than, or greater than the MARGINAL cost of serving that new 3% (or less)? The question can be answered under a model that subsidizes the producer for the difference between total revenue and total cost, and then makes output or sales decisions based on price exceeding unit marginal cost but falling short of unit total cost. The entire concept is completely intuitive. Think it through from the perspective of a producer who is being subsidized. Average cost doesn't matter. The subsidy relative to the average cost doesn't matter. The only thing that matters is whether in-state tuition exceeds marginal cost.

Imagine that you are running a hot dog stand. You have only 2 costs: the fixed cost of the stand, and the variable (aka marginal cost) of the hot dogs. The stand costs you $100/month regardless of how many hot dogs you sell. The hot dogs cost you $1 each. You're currently selling 100 units per month at a price of $1.50/unit.

Does selling more units improve or hurt your bottom line?

To really parallel this example, imagine the state government has agreed to subsidize the difference between the price of the hot dogs and the average cost of the hot dogs, essentially cover your losses.

Does selling more units reduce or increase the amount of money the state must subsidize your stand?

The concept is of per unit revenue (price) exceeding variable cost, but not covering total cost. In such a scenario, you reduce your losses by increasing production. Each additional unit sold covers all the variable cost and has a little left over to contribute to paying the fixed cost.

This is an economies-of-scale concept where the producer is operating inside of the optimal economy of scale.

It would be as if a car company invested in a new expensive factory and at 100 units per month, the market price of a car couldn't cover the total cost of production, but at 1000 units per month it could.

In-state public education will always be a money losing operation for the government, but increasing total output will make it less of a money losing operation as long as tuition covers the variable cost.

-- Also at my Seeking Alpha blog --