0915 Taxes and Economy

Back in September, I spent a few days hosting "The Ed Show." I wanted to do a segment taking a closer look at some of the claims and counter-claims surrounding Mitt Romney's tax plan, and so I invited Bruce Bartlett, one of Washington's most knowledgeable and experienced tax hands, onto the show. "I have something for you," he said before he left. Then he slid a copy of a new Congressional Research Service report on marginal tax rates across the table.

Not to brag, but people give me a lot of reports on marginal tax rates, so I didn't think much of it. But when Bob Greenstein, director of the Center on Budget and Policy Priorities and a guest on a later segment, saw the paper, he lit up. "I printed that out to read tonight!" he said happily.

CRS's analysis is fairly simple, and not even all that new. They note that at many points in the 20th century, America had much higher top marginal tax rates than we do now. So they ran some regressions and marshaled some research in order to see if they could detect any evident relationship between high tax rates and growth, productivity, income inequality, or other key economic indicators. The answer? Not really:

Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.

There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced. 

I didn't end up posting on the report because it didn't strike me as terribly new or even all that rigorous. But it sure upset Senate Republicans. They didn't like the report's tone. They also had some methodological criticisms, including that the analysis "was looking for a macroeconomic response to tax cuts within the first year of the policy change without sufficiently taking into account the time lag of economic policies" and that it "did not take into account other policies affecting growth, such as the Federal Reserve’s decisions on interest rates."

Note that both these critiques, while reasonable, imply that tax cuts don't boost growth quickly, and that they may not boost it at all if the Federal Reserve doesn't cooperate. Keep that in mind next time you hear that tax cuts are sure to get this economy back on its feet, and fast.

But the Senate Republicans didn't just snipe at the report. According to The New York Times, they got CRS to pull the report from its Web site.

That's not how these debates are supposed to go. Criticize the report. Dismiss it. Ignore it. Release your own. But don't get it pulled. And so, in the spirit of free inquiry, here's the report, in full. Read it for yourself.