Referring to Ayn Rand’s 1957 novel, Atlas Shrugged, economists Emmanuel Saez and Thomas Picketty are arguing that higher tax rates does not cause Atlas to shrug. That is, high tax rates do not cause the wealthy to work less hard.
As evidence, they cite the Reagan tax cuts, which reduced the top marginal rate from 70 percent to 28 percent:
The economy actually grew faster in the 30 years before that tax cut than it did during the following three decades, according to Diamond and Saez. Gross domestic product per capita advanced at an average annual 2.2 percent rate between 1950 and 1980, compared with 1.7 percent between 1980 and 2010, their calculations show.
Taken out of context, these statistic might seem to prove Diamond and Saez correct. But tax cuts do not occur in a vacuum. Other factors impact economic growth (further, economic growth is a misleading and essentially useless statistic). For example, regulations can have a huge impact on economic growth.
Regulations divert resources from production to compliance. Regulations force businesses to meet the demands of bureaucrats rather than the demands of the market. Instead of producing goods and services, regulations force businesses to produce government forms and secure government permission.
In the thirty years since the Reagan tax cuts, the number of regulations has exploded. In 1960, the Code of Federal Regulations (CFR) contained 22,877 pages. By 2007, the CFR had swelled to 145,816 pages, an increase of more than 530 percent. A report by the Competitive Enterprise Institute found that the cost of meeting federal regulations was $1.751 trillion in 2008. State and local regulations add another $446 billion in expenses to Americans each year. In total, the various federal, state, and local regulations impose on each person more than $6,600 per year in regulatory compliance costs.
Statistics can be useful. But statistics taken out of context are misleading and intellectually dishonest.