Archive for September 9th, 2007
Taxes and GDP growth
This is a continuation of my writings on stock market returns and taxation which can be found ( here ). Now I am exploring the possible affects that tax policy has on GDP growth in the United States. This is what I’ve found.
Lowering Taxes Raised Taxes
Yr. GDP Growth Yr. GDP Growth
26 3.27 32 .6
28 .555 35 6.5
45 -0.9 40 8.5
48 -0.3 41 9.25
54 3.565 42 8.2
64 3.205 43 4.055
69 .01 44 -0.6
75 -3.4 50 3.87
76 5.64 51 1.91
77 4.7 54 3.565
78 5.57 62 5.2
81 2.45 68 1.54
86 3.37 71 2.88
97 4.5 82 -2.07
01 .75 93 2.67
03 2.7
Total
2.43 3.738
Does this mean raising taxes is better for the economy? Not always. The economy expanded at great pace during the WWII build up. We aren’t using another great period of war build up with tax cutting involved to create a perfect comparison. It is worth noting that until The War in Iraq we have never gone into a war cutting taxes, so it is almost impossible to compare. To discount the Great Depression and WWII, I started at the year 1950. Since then, the year taxes were lowered the GDP averaged 2.29 and the years taxes were raised–in the same time period–clocked in a GDP of 2.45.
If we take non-inflation adjusted numbers provided by the BEA we get a GDP rate of 9.5 for years where taxes are raised, and a GDP rate of 7.125 for GDP when taxes were cut. Once again by extracting the years of the Great Depression and WWII (starting at 1950) we get a GDP rate of 7.0375 for years when taxes were raised and a GDP of 7.329 when taxes were lowered.
Moreover, we see raising taxes or lowering taxes can both be a good thing. However, neither are inherently good nor bad for the countries economic growth. Though economic growth is not highly correlated with stock market returns, this helps to further support the findings that tax actions in either direction do not inherently effect stock market returns.
Sources: USDA , Economic History Services , BEA
Did I Get it Wrong?
Is it possible I got it wrong already on here? Very interesting take on the payroll numbers by the folks at Marketminder.com
“Another way to look at the issue is through the classic MarketMinder principle of scaling. As of the most recent tally, the US workforce is 153.5 million strong. Today’s jobs report indicated a loss of 4,000 jobs. That constitutes a workforce contraction of…wait for it…0.00003, or three thousandths of a percent. When scaled properly, this feels like far too much hullabaloo over three thousandths of a percent.”
It has also been noted that August is traditional a weak month for job creation as kids go back to school and quit their summer jobs. This does seem to be a factor, how large of one I am not sure.
Certainly does look different from that angle. I do believe, however, that this will be a precursor for a higher unemployment number in a few months. They also argue that if the housing market is losing 62,000 jobs, construction losing 22,000, but we only lost 4,000 then by definition jobs are being created in other sectors. Thus sub-prime is not spilling over because other sectors are creating jobs. This may very well be true and certainly will be something to look out for.
