GOP didn’t like the study on impact of tax cuts on economic growth

by Linda Beale

GOP didn’t like the study on impact of tax cuts on economic growth

The Congressional Research Service has long been respected as a non-partisan research organization that does in-depth studies as requested by Congress.  But when those non-partisan studies produce results that don’t jive with the right-wing mythology about tax cuts as the cure-all for slow economic growth, the right goes on the attack.

On September 14, 2012, the Congressional Research Service released a report by Tom Hungerford on the impact of tax cuts on economic growth.  Tom Hungerford,Taxes and the Economy: An economic analysis of top tax rates since 1945 (CRS, Sept. 14, 2012).

Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie). Proponents of higher tax rates argue that higher tax revenues are necessary for debt reduction, that tax rates on the rich are too low (i.e., they violate the Buffett rule), and that higher tax rates on the rich would moderate increasing income inequality (change how the economic pie is distributed). This report attempts to clarify whether or not there is an association between the tax rates of the highest income taxpayers and economic growth.

This was an update of a report by Jane Gravelle and Donald J. Marples, Tax Rates and Economic Growth, CRS (CRS Report R42111) and so was not an attempt to rewrite that report but to look only at the top tax rates. 

The Hungerford study didn’t find a correlation between lowering top tax rates and economic growth, but it did find one between lowering top tax rates and increasing inequality.

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 withregard 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. Id.

That is in fact what one would expect, and increased inequality has its own harmful effects on the economy.
On September 17,  the Heritage Foundation squawked about the Hungerford study.  See Congressional Research Service Wrongly Implies Lower Tax Rates Don’t Strengthen Economy, Heritage Foundation (Sept. 17, 2012).  Heritage acknowledges that the Hungerford report looks at a “slew of time periods” but it claims that the “simplistic correlations prove nothing.”  Id.  It suggests that since no two timeframes can be exactly the same, the correlations are meaningless.  If only the study had been tweaked the way the Heritage Foundation would have tweaked it, it would have supported Heritage’s position that lower tax rates on the top produce economic growth, it suggests.

But this is itself a simplistic analysis. The complaint that the paper didn’t take all the variables into account is a red herring.  The study offered a simple correlation study–looking just at the tax rates and economic growth, does a pattern emerge upholding the GOP view that tax cuts stimulate growth or not.  The answer is “not”.  Now, there are lots of other variables that could be considered–global warming, military involvement, and decaying infrastructure are all likely relevant to how we should spend our resources and likely also have a significant impact on the economy.  But self-serving assumptions about the “dynamic” effect of tax cuts are not.  For the broader view on tax rate analyses, Hungerford refers the reader to the 2011 Gravelle paper.  The problem with economic analyses in the market fundamentalist approach is that the answer can be manipulated by tweaking the selected data points, the time lag between policy and a change point, the way the discount rate is chosen, or whatever.   The Heritage position confuses savings and investment, missing the point that when interest rates are already down, savings can’t have much impact in reducing interest rates to make investment more attractive.

The  outcome of the right’s attack on a CRS study that came to a result it didn’t like is worrisome.  Instead of noting the limited goal of the paper (to see if there were correlations over time of tax rates and economic growth), the CRS yielded to pressure and pulled the study. See Jonathan Weisman, Nonpartisan Report Withdrawn after GOP Protest, New York Times (Nov. 1, 2012). The withdrawal was counter to the recommendation of the service’s economic leaders. That says that CRS is vulnerable to pressure from those who want a study to show a particular outcome.  And that is not good.

cross poseted with ataxingmatter