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
Rachel Maddow talked about this report and the subsequent removal. The report is still available at
http://www.dpcc.senate.gov/files/documents/CRSTaxesandtheEconomy%20Top%20Rates.pdf
The summary page has all you need to know, but if you understand how to read a simple regression analysis all the details are there too. This report being pulled is indeed disturbing.
Book burnings are a GOteaparty tactic.
Download the .pdf and save it.
A tax policy that provides incentives to sell the seed corn, does not ehnace econmic growth who’d a thunk it? If tax rates are low enough tax incentives for reinvestment are less likely to be effective.
Lets run down the GDP formula, and how taxes might mathematically effect GDP.
GDP = G + C + I + N
G is government spending
C is consumer spending
I is business spending (investment)
N net exports
IMO taxes only boost GDP if it boosts C the largest portion of GDP. It is a lie to say tax cuts could not effect GDP. They can mathematically, but it depends whether or not those cuts are spent by consumers.
Governmnet spending is totally up to congress. They are not technically dependent/constrained on/by taxes to spend. However, some politicians may push for less spending based on their belief they are limited by revenues, which is a totally false belief. But, that false belief can effect what spending they propose or hold it back.
I is not necessarily tax constrained, but constrained by aggregate demand. If business does not expect consumers or government to spend then they will hold down investment.
Mathematically, if a tax cut gets all spent on imports then it should negatively effect GDP.
Basically, tax rates have been fiddled its at the margins and tilted toward the higher end. Also because people are so indebted now any tax savings will probably go to service debt having no effect on C. The latter might help future consumption.
Also, why can’t economists get this right – Net Private savings is the deficit to the penny. If tax revenues lower the deficit then net private savings decreases. Federal Deficits = Net Private Savings + Net Imports. Only the federal government creates net savings dollars, which is related to taxes and spending.
Ah yes, the Buffett rule.
Warren Buffett complains tediously that his income tax rate is too low and that he and all the “rich” should pay more. To rectify this all Warren Buffett had to do was NOTHING! Then when he died 55% of his wealth would goto the IRS as an inheritance tax. Case closed.
But he didn’t do that, instead he gave all his money to the Bill and Melinda Gates Foundation and took a 100% deduction therefore avoiding giving his money to the IRS. I believe Warren Buffett is a wise man a his actions tell us a lot. He believes that Bill and Melinda Gates can spend his money better than the US Government and he may be right. He preaches higher taxes for us but practices personal choices for himself. I wish he’d get his message correct and stop playing politics.
@Mcwop,
If deficit borrowing equals net private saving, you missed that a lot of that saving is foreign and not private some of which goes to lending to Uncle Sam.
How come US don’t tax away all that net saving?
Why pay interest when the “savers”, sovereigns and private, don’t have better use for the cash?
Where does the Quant Easing from the 99year old federal reserve come in, even though half of QE III is going to banksters sucking up trash from their insolvency?
Mcwop,
It might do you good to read a basic text on macro-economics which gives a rudimentary lesson on money.
Then when you think you get that read the same text on aggregate demand.
As I recall from 40 odd years ago neither are long or hard reading.
Anon 1 I think you missed part of the formula:
Public deficit = Private savings + Net Imports
Net imports addresses the foreign component.
Not sure I understand why the government should tax away net savings. Increased taxes reduce net private saving, which is not a good thing. The deficit is savings.
Why pay interest – well the government ttchnically does not need to issues debt at all if it did not want to.
QE is an asset swap long term bonds converted to short term paper increasing reserves. It knocked a few bps off of long rates.
Anon 2
I am not sure what you mean when you say rudimentary lesson on money – tell me exactly where I went wrong. We can discuss.
Hi Angry Bear,
This is off topic. You invited answers to some questions about full reserve banking some time ago here:
http://www.angrybearblog.com/2012/01/full-reserve-banking-and-loanable-funds.html
I’ve just suggested some answers on my own blog here:
http://ralphanomics.blogspot.co.uk/2012/11/angry-bears-ideas-on-full-reserve.html