Bill Gates' Claim on High Taxes and Economic Growth

Strategic Insights -

The highest economic growth decade in the US was indeed the 1960s, a period marked by high marginal tax rates, including a peak of 90 percent, but also significant growth in Gross Domestic Product (GDP). Microsoft co-founder Bill Gates made this claim in an interview on CNN's Fareed Zakaria GPS on May 17, 2015, stating that the idea that low tax rates would unleash productivity was "nonsense." He pointed to the 1960s as a time when high growth and high marginal tax rates co-existed. A closer examination of the data, however, reveals that the top tax rate was not always 90 percent throughout the decade, and other factors influenced the economy.

Key Takeaways:

  • The 1960s saw the highest average annual GDP growth rate (4.36%) among the post-World War II decades in the US.
  • The top marginal tax rate in the US was 90 percent or higher for most of the 1960s, but dropped to 77 percent in 1964 and 70 percent from 1965 to 1966.
  • Bill Gates is correct that high tax rates and high economic growth occurred in the 1960s, but his claim that the top tax rate was 90 percent for the entire decade is slightly off.
  • The connection between taxes and economic growth is complex, and economists have reached different conclusions about the relationship between tax changes and economic activity.
  • Studies by William Gale and Andrew Samwick at the Brookings Institution and Christina Romer and Dave Romer at the University of California-Berkeley have found that tax cuts often have a limited impact on economic growth.
  • Gates favors a shift to taxing consumption rather than labor and income.

Statistics:

  • Average GDP growth rate in the 1960s: 4.36%
  • Highest marginal tax rate in the 1960s: 91% (1961-1964), 77% (1964-1965), and 70% (1965-1966)
  • Top tax rate in 1964: 77%
  • Output reduction over three years due to a 1% increase in tax rate: nearly 3%

Sources:

  • CNN, Fareed Zakaria GPS, May 17, 2015
  • Bureau of Economic Analysis, GDP percent change from preceding period, 1930-2014
  • IRS, Individual Income Tax: Personal Exemptions and Lowest and Highest Bracket Tax Rates, 1913-2012
  • Brookings Institution, Effects of Income Tax Changes on Economic Growth, September 2014
  • American Economic Review, The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, June 2010
  • Gatesnotes, Why Inequality Matters, Oct. 13, 2014