G14 Tax Policy vs GDP Growth 1920-2010

Here is the annual GDP growth rate since 1920 in black. The red line shows a three factor regression model. This tax policy model includes the influences of the top bracket from Figure G9, the top marginal rate from Figure G12 and the capital gains tax rate from Figure G13.

The model accounts for the linear correlation of the top bracket, the curvilinear correlations of the two tax rates and how the curvilinear correlations change as the top bracket rises. This model estimates that the current baseline growth rate for the economy is 1.1%.

The annual growth fluctuates much more than the growth predicted by tax policy. Many of the other factors affecting annual growth may have little effect on the long term trend. Looking at the growth rate over 5 year periods as shown in Figure G15 may show more clearly the impact of tax policy on long term growth.

G8 Tax Policy vs Long Term Growth 1968-2010

Here are the 5 year estimates of growth based on the model in Figure G7. The five years 2008-2012 is estimated to annualize growing 0.3% a year, down from the 0.9% annualized for 2006-2010. To hit the 0.3% forecast precisely, 2011 and 2012 would need to grow at a 0.8% rate.

G4 Tax Policy vs Long Term Growth 1984-2010

The major fluctuations in the long term rate of growth over the last 27 years correlate with tax policy. The last data point on the black GDP growth line shows the annualized rate of growth for the five years 2006-2010 at 0.9%. The corresponding point on the red line, estimating 1.2% growth is calculated from the estimates for 2006-2010 shown in Figure G3.

The model suggests the 5 year periods 2008-2012 and 2009-2013 will annualize growing 0.8%.