There are three fallacies and two dangers at the heart of Mitt Romney’s tax policy.
The first is the argument that cutting personal income tax rates would lead to economic growth robust enough to help pay for a big chunk of the cuts. The second, related, fallacy is the contention that raising rates on top earners would hurt growth. The third is that raising capital-gains rates would be even more harmful.
There is scant reliable evidence for any of the above, yet Romney and fellow Republicans hitch their entire economic argument to them. And their rabid pursuit of lower taxes leads to two dangers: further ballooning the national debt and further increasing income inequality.
To be clear: Holding everything else equal (ignoring, for example, the economic drag of bigger deficits), lower tax rates are better than higher ones. A simpler tax code would be far preferable to the current byzantine mess. Lowering rates and broadening the base is a dandy idea — when done in a way that also raises badly needed new revenue.
Not done the way Romney proposes, with the goal of merely avoiding greater debt. Even that hinges on the faith-based assertion that this revenue neutrality can be achieved through the ensuing miracle of faster economic growth.
History counsels against counting on tax miracles.
First, would lower rates, as Romney claims, produce economic growth? “Past changes in tax rates have had no large clear effect on economic growth,” the nonpartisan Congressional Research Service (CRS) concluded in a December review.
Consider: The economy grew at 3.9 percent from 1950 to 1970, when the average top marginal income tax rate was 84.8 percent. From 1987 to 2010, when the average rate was less than half that (36.4 percent), economic growth was far less robust, 2.9 percent.
This comparison might be misleading because multiple factors affect the economy, so the CRS looked at a shorter, more recent time span.
From 1987 through 1992, the top average marginal income tax rate was 33.3 percent. Economic growth averaged 2.3 percent.
From 1993 through 2002, after taxes increased under President Clinton, the average top marginal rate was 39.5 percent. Economic growth averaged 3.7 percent.
Finally, from 2003 through 2007, after the Bush tax cuts, the average top marginal rate was 35 percent. Economic growth averaged 2.8 percent.
If you were going to make a causality argument from these figures, it would be that lower taxes correlate with lower growth. Such a leap isn’t justified — but where is the proof supporting Republicans’ insistence that lower rates fuel growth?
Second, and this is at the heart of the current debate over letting the Bush tax cuts expire, would raising rates on upper-income taxpayers threaten growth?
A new CRS report suggests not — but it underscores the risk of the other danger, increasing income inequality. Lower top rates do not correlate with increased savings, investment or productivity, the CRS found. Top tax rates, it concludes, “appear to have little or no relation to the size of the economic pie.”
But lower top rates do help the rich serve themselves a heftier slice of that pie. Reducing top rates, the CRS noted, appears “associated with the increasing concentration of income at the top.”
Which leads to the final question: whether lower capital-gains rates, whose benefits flow overwhelmingly to the wealthiest, are justified.
Romney told CBS News’ “60 Minutes” that his own 14 percent effective income tax rate in 2011 was fair because lower taxes on investment are, repeat after me, “the right way to encourage economic growth.”
Evidence, please? Leonard Burman of Syracuse University’s Maxwell School looked at capital-gains rates over six decades and found no correlation with economic growth. Look at his graph and you’ll see: The two lines — capital-gains rates and growth — bear no relation to each other.
Burman tried adjusting for time lags, of up to five years, and looking at moving averages of tax rates and growth. Still no correlation. “There is no apparent relationship,” Burman told the Senate Finance Committee last week. “Cutting capital gains taxes will not turbocharge the economy, and raising them would not usher in a depression.”
At a moment that demands seriousness about the debt, the country is trapped in a tax debate premised on unproven assertions and flawed history. It risks producing fiscal chaos and social instability. You’d think a numbers guy would at least look at the numbers before taking this dangerous tax leap.