Where's the Data?

Jim writes:

This suggests to me that nobody really knows what they're talking about when it comes to economics.

I couldn't agree more. That's why I generally insist on seeing supporting data before I buy into an economic or social policy.

For example, communism was tried by many countries, and in every case it ended up as a totalitarian disaster. The data is pretty clear on that one.

Similarly, tax policy and its relationship to economic growth seems fairly clear. Virtually every time a country cuts taxes significantly, economic growth increases from its baseline (sometimes with a lag). In fact, I challenge anyone to find a single case where a country that's at least somewhat developed cut taxes and had an economic slowdown that started shortly thereafter. The converse is true as well. The vast majority of times a country raises taxes, its economic growth slows from the baseline rate.

So there is little doubt in my mind that cutting taxes is positively correlated with increased GDP growth. What's still debatable is whether or not a majority of the people benefit from that growth. Many people believe that GDP growth only benefits the rich (who've just had their taxes cut), and most others lose out.

However, the data doesn't support the belief that except for the rich, most others lose out. For example, consider the following table:

===================================================================
Median and Average Family Income by Family Size, U.S., 1947-2000
Source: U.S. Census Bureau, U.S. Department of Commerce,
Housing & Household Economic Statistics Division,
Income Surveys Branch

				Ave.	Median Income

Size &	Number	Current	 2000   Family	Growth

Year	(1000's)   $	   $	Size	2000 dollars

2000 	72,388	50,890 	50,890 	3.17	 0.59%

1999	72,031	48,950	50,594	3.17	 2.59%

1998	71,551	46,737	49,317	3.18	 3.42%

1997	70,884	44,568	47,687	3.18	 3.13%

1996	70,241	42,300	46,240	3.19	 1.41%

1995	69,597	40,611	45,599	3.2	 2.15%

1994	69,313	38,782	44,638	3.19	 2.68%

1993	68,506	36,959	43,472	3.2	-1.49%

1992	68,216	36,573	44,129	3.19	-0.86%

1991	67,173	35,939	44,514	3.17	-1.93%

1990	66,322	35,353	45,392	3.18	-1.61%

1989	66,090	34,213	46,135	3.17	 1.85%

1988	65,837	32,191	45,297	3.16	 0.29%

1987	65,204	30,970	45,166	3.17	 1.67%

1986	64,491	29,458	44,425	3.19	 4.37%

1985	63,558	27,735	42,564	3.21	 1.48%

1984	62,706	26,433	41,944	3.23	 3.41%

1983	61,997	24,580	40,559	3.24	 0.71%

1982	61,393	23,433	40,273	3.26	-1.11%

1981	61,019	22,388	40,725	3.25	-2.64%

1980	60,309	21,023	41,830	3.27	-3.42%

1979	59,550	19,587	43,311	3.29	 1.50%

1978	57,804	17,640	42,671	3.31	 5.64%

1977	57,215	16,009	40,391	3.33	 0.61%

1976	56,710	14,958	40,148	3.37	 3.12%

1975	56,245	13,719	38,935	3.39	-1.80%

1974	55,698	12,902	39,649	3.42	-2.59%

1973	55,053	12,051	40,702	3.44	 2.03%

1972	54,373	11,116	39,894	3.48	 4.85%

1971	53,296	10,285	38,048	3.53	-0.20%

1970	52,227	9,867	38,123	3.57	-0.20%

1969	51,586	9,433	38,201	3.58	 4.72%

1968	50,823	8,632	36,480	3.6	 4.62%

1967	50,111	7,933	34,869	3.63	 2.20%

1966	49,214	7,532	34,117	3.67	 5.15%

1965	48,509	6,957	32,445	3.69	 4.34%

1964	47,956	6,569	31,095	3.7	 3.74%

1963	47,540	6,249	29,974	3.7	 3.52%

1962 	47,059	5,956	28,954	3.68	 2.85%

1961 	46,418	5,735	28,151	3.67	 1.06%

1960	45,539	5,620	27,857	3.7	 1.91%

1959	45,111	5,417	27,334	3.67	 5.85%

1958	44,232	5,087	25,824	3.65	-0.45%

1957	43,696	4,966	25,940	3.64	 0.45%

1956	43,497	4,780	25,824	3.6	 6.80%

1955	42,889	4,418	24,179	3.58	 6.25%

1954	41,951	4,167	22,756	3.59	-2.41%

1953	41,202	4,242	23,317	3.59	 8.10%

1952 	40,832	3,890	21,570	3.53	 3.03%

1951	40,578	3,709	20,935	3.54	 3.50%

1950	39,929	3,319	20,227	3.54	 5.54%

1949	39,303	3,107	19,166	3.54	-1.32%

1948	38,624	3,187	19,422	3.58	-2.73%

1947	37,237	3,031	19,967	3.64	

(Families as of March of the following year. Income
in current and 2000 CPI-U-RS adjusted dollars/)
=======================================================================

Two significant tax cuts occurred during this table: Kennedy's tax cuts in 1963 and Reagan's tax cuts in 1982. Now consider the growth rate of the median household income (in constant 2000 dollars) in the years before and after these tax rate changes. Since the median household income rate of growth fluctuates some, it's necessary to average a few years (I've picked five but anything between two and six gives similar results) before (the baseline rate) and after (the resultant rate). The following table shows the effects of the tax changes:

				Baseline	Resultant	Change in

Year	Change			Rate		Rate		Rate

------------------------------------------------------------------------

1982 	Reagan Tax Cut		0.34%		2.33%		+1.99%

1963 	Kennedy Tax Cut		2.24%		4.01%		+1.77%

Both sets of tax cuts increased the rate of growth of the median household income by nearly 2%. That's nearly double the average rate of growth for the duration of the table.

Of course, a sample size of two is not statistically significant. Nor will a sample size of three be statistically significant after we see what happens with the latest round of tax cuts. However, my point is that there isn't any data at all that gives any support to the assertion that except for the rich, most people lose out when there are tax cuts. If anything, what little data there is indicates that a majority of people benefit when taxes are cut and also that when GDP grows, so does income for most people.