Ryan Bourne accuses lefties (via) of ignoring Karel Mertens paper (pdf) which claims that lower top marginal tax rates in the US have led to faster GDP growth.

However, this result is achieved by torturing the data. Martens estimates, Simple univariate regresssions show, says Mertens, that "tax rate increases are associated with higher income growth." It is only by imposing various controls that he finds that tax rate cuts lead to faster growth. And this opens up a potentially interminable argument about what we should control for and what not.

To see my point, consider the UK data. In 1988, Nigella's dad cut the top marginal tax rate from 60% to 40%. In the following 22 years - until the rate rose to 50% - real GDP grew by 2.4% per year. But in the previous 22 years, it had grown by 2.6% a year*. A cut in the top tax rate, then, led to slower growth. There are three possible reactions to this:

1. The tax cut actually made no difference to growth: 0.2 percentage points is well within the sort of difference we'd expect from random fluctations. Indeed, it's possible that there are almost no feasible policies which noticeably affect trend growth.

2. The tax cut actually reduced GDP growth. This might be because the income effect encouraged wealth creators to retire early, or because it incentivized rent-seeking or the growth of a banking sector which thrived only by creating risk pollution.

3. The tax cut on its own would have raised GDP growth, but other factors offset this benefit.

People like Ryan must argue for point (3). But this is tricky. Many rightists - in fact, not (pdf) just rightists - would argue that other Thatcherite reforms of the 1980s and 90s should have raised trend growth: the reduction in trades union power; privatization; the abandonment of wage and price controls; lower corporate tax rates; and perhaps (pdf) inflation targeting.

To claim that Lawson's tax cuts boosted GDP growth thus requires one to argue either that the many pro-market reforms of the 80s and 90s had no great beneficial effect or even a negative effect, or that some other factor greatly depressed growth and offset all these benefits**. This requires some arguing.

For me, the message of all this is simply that aggregate GDP data just don't permit us to draw robust inferences about policy effects. Not only is theory ambiguous, but so is the data. For this reason, among others, Merten's paper is certainly not (pdf) the consensus view.

I suspect the argument about what the top tax rate should be is not one that can be settled by the data.

* I think it's important to take as long a period as possible here, firstly because doing so reduces the standard error around growth estimates, and secondly to allow for the (very plausible) possibility that tax rates have long-run effects by shaping social norms.

** We can leave public spending out of this. It averaged 37% of GDP from 1988 to 2010, compared to 37.5% in 1966-88.