After the U.S. elections, Washington can no longer defer America’s fiscal cliff. However, inconvenient truths can be suppressed, as evidenced by suppression of the CRS report on tax rates and economic growth.
Recently, the New York Times reported that the Congressional Research Service (CRS) has withdrawn an economic report, after Senate Republicans raised concerns about the paper’s findings and wording.
The slim 23-page report discovered no correlation between top tax rates and economic growth. While the conclusion is in line with much of conventional wisdom in economic research, it goes against the central tenet of conservative economics.
Taxing Less, Growing Less
When the report was released on September 14, it was barely noticed, which probably says something about our diminished sensibility to income polarization. More attention followed after Senator Charles E. Schumer (NY-Dem) referred to the study a week and a half after it was withdrawn, in a speech on tax policy at the National Press Club.
The pre-election timing served well the Democratic campaign. In turn, Republicans acknowledged that they protested its tone and findings.
Most Americans may know little or nothing about the CRS, the public policy research arm of the U.S. Congress. Usually, CRS reports are widely regarded as in depth, accurate, objective, timely – and nonpartisan.
Entitled “Taxes and the Economy,” the report by Thomas L. Hungerford focused on the economic analysis of the top tax rates since the postwar era. It is not an uncontroversial subject matter.
After all, some policymakers have argued that raising tax rates, especially on higher income taxpayers, to increase tax revenues is part of the solution for long-term debt reduction.
Historical trends are relatively clear. In the early postwar era, the top marginal tax rate was above 90%. Today it is 35%. Further, the top capital gains tax rate was 25% in the 1950s and 1960s, and 35% in the 1970s. But 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 to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Hutherford concludes that the reduction in the top tax rates have had little association with saving, investment, or productivity growth.
However, the top tax rate reductions do seem 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.
Against Historical Evidence
As Washington must soon focus onto the “fiscal cliff,” some consider the CRS report inconvenient. After all, the idea that the less 1% of Americans pay taxes, the more the remaining 99% will prosper is not exactly supported by more than 65 years of historical experience.
By 2019, the Bush tax cuts and the wars in Iraq and Afghanistan are likely to account for nearly 50% — nearly $9 trillion — of the $18 trillion in debt that America will owe under current policies.
Today, the U.S. public debt burden is close to $16.2 trillion; $2 trillion more than in August 2011, when Washington lost its triple-A credit rating.
The simplest way to begin to stabilize or reverse the rise in the ratio of debt to GDP would be to allow the 2001 and 2003 tax cuts to expire in the medium term. That, however, would go against the central conservative tenet.
It would also go against Grover Norquist’s “taxpayer protection pledge,” which has been signed by 95% of all Republican Congressmen, to oppose increases in marginal income tax rates for individuals and businesses.