The Wonk Room

Rep. Garrett And CNBC Peddle Misinformation About Taxes, Productivity, And Business Investment

Last night, CNBC hosted a spirited discussion with Rep. Scott Garrett (R-NJ) regarding the proposed tax increases in the Obama administration’s budget. When CNBC’s Donny Deutsch expressed skepticism that the increases will really “bring business to our knees,” the rest of the CNBC crew jumped all over him. “That will discourage investment, yes, yes,” they said.

Garrett then issued a challenge, asking Deutsch to “give me an example of once during the history of this country where raising the taxes actually increased productivity, increased business investment.” Watch it:

Deutsch tried to respond with “the Clinton years,” and was shouted down by the rest of the CNBC gang. But he was exactly right! As CAP’s Michael Ettlinger found:

When examined at equivalent points in the business cycle, productivity growth was greater after 1993 than during either of the supply-side eras [1981 and 2001]…Overall for these periods the average annual productivity growth was 1.9 percent during the expansion following the 1993 legislation, and 1.7 percent for both supply-side eras.

And as for business investment:

In the two supply-side eras the average growth rate in real investment was unimpressive: It was 2.8 percent in the seven-year period beginning in 1981 and 2.7 percent in the period beginning in 2001. In the period with higher taxes beginning in 1993, the growth rate was 10.2 percent.

The Bush tax cuts “were actually followed by a pronounced decrease in the fraction of G.D.P. devoted to business investment.” Here’s a graph, courtesy of Princeton professor Uwe Reinhardt, showing business investment falling during the Reagan and Bush eras, but rising during the Clinton years:

It appears that productivity, business investment, and taxes don’t have the relationship that Garrett and Deutsch’s co-hosts think they do.