It's Official: Cutting Top Tax Rates Doesn't Grow the Economy, It Only Grows Income Inequality



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 A new study by the non-partisan Congressional Research Service (CRS) using data from the past 65 years found that there is no correlation (PDF) between top tax rates and economic growth. But it doesn’t stop there. The study also found that there is a correlation between the reduction in top tax rates and the increasing concentration of wealth toward the top of the income distribution. The report, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, is also clear that this is not only about tax rates on regular income, and points out (PDF) that “changes in capital gains and dividends were the largest contributor to the increase in income inequality since the mid-1990’s.”

This has to be just about the last nail in the tax-cutting, supply-side coffin. CRS is a bunch of smart people at the Library of Congress whose mission is “providing comprehensive and reliable legislative research and analysis that are timely, objective, authoritative, and confidential, thereby contributing to an informed national legislature.”  And while the study has earned volumes of media coverage, it’s worth noting that even the Wall Street Journal report didn’t quibble with the study’s finding that “tax cuts for the rich don’t seem to be associated with economic growth…. [but] can be linked to a different outcome: income inequality.”

The CRS findings fall in line with the increasing consensus showing that supply-side tax cuts touted by people like Arthur Laffer have been an enormous failure over the past several decades. As Citizens for Tax Justice’s Bob McIntyre has pointed out, even George W. Bush’s own Treasury Department conceded in 2006 that the Bush tax cuts (which were mostly targeted to the wealthiest Americans) would not have a significant effect on economic growth over the long term. And every few weeks in his New York Times blog post, Ronald Reagan’s former advisor, Bruce Bartlett, explains that tax cuts really can not and do not make an economy healthy.

For numbers crunchers, here are some details about the study. To explore the connection between top tax rates and economic growth, the CRS performed two regression analyses comparing the top income and capital gains tax rates to the private savings rate, productivity growth rate, and real per capita GDP from 1945 to 2010. The results of the analysis reveal that there is simply no statistically significant relationship between tax rates and savings, productivity, or real per capita GDP.

To examine the effect of top tax rates on income inequality, the CRS used a regression analysis comparing the top income and capital gains tax rates to the share of income earned by the top 0.1% and 0.01%. The analysis found that there is a statistically significant negative correlation between the share of income received by the top 0.1% and 0.01% of income earners and the level of the marginal tax rates. In other words, lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.

Citizens for Tax Justice and other economic think tanks have been demonstrating the flaws in supply-side tax cuts for decades, and the public is increasingly catching on about taxes in particular and economic inequality more generally. With these two issues high on the election year agenda, maybe 2012 will be the year supply-siders, voodoo economists, wishful thinkers and other magical thinkers lose their credibility, once and for all.



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UPDATE, November 1, 2012:
According to a New York Times story, "[t]he Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economy theory, after Senate Republicans raised concerns about the paper’s findings and wording." The study referred to is the one CTJ blogged here when it was first published in September 2012.

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UPDATE, December 13, 2013: The report has now been reissued with little changes and the same basic conclusions are contained in the original report.

 

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