Brandon Parsons Examines Top Tax Rates and U.S. Economic Growth

In a new peer-reviewed study, Pepperdine Graziadio Business School faculty member Brandon Parsons examines the long-run reduced-form relationship between top marginal federal income tax rates and U.S. economic growth using annual data from 1929 to 2024. Challenging conventional supply-side economic models that predict lower marginal tax rates uniformly drive higher economic growth, the study reveals a non-monotonic, quadratic relationship: higher top marginal rates are positively associated with subsequent growth per capita across lower and moderate tax brackets, with the growth effect turning negative only at elevated tax levels near a 64 percent threshold.

To explain this empirical pattern, the study introduces the "Aston Martin mechanism," a microeconomic framework centered on the capital allocation decisions of owner-managed and closely held firms. When top personal income tax rates are high, extracting corporate earnings for personal consumption becomes expensive in pre-tax terms, altering business owners' decisions. This higher extraction cost creates a strategic incentive to retain earnings within the firm, expanding the internal pool of funds available for capital reinvestment, technology adoption, and operational expansion without relying on external debt or equity markets.

These findings hold up across different historical eras, remaining consistent both before and after the 1982 introduction of SEC guidelines on corporate share buybacks. While these results show correlation rather than direct causality, they offer critical guidance for economic policy. Rather than assuming tax cuts automatically drive growth, policymakers need to look at how personal tax rates actually influence corporate savings and business investment—especially when credit is tight.

Read the full article here.