The Congressional Research Service has released a study of tax rates, economic growth and income inequality from 1945 to the present day. Unsurprisingly, the study finds that the only economic plan the Republican party ever has — cutting income taxes for the wealthy — does not spur economic growth, but does shift the tax burden to everyone else (and drops federal revenue, thus creating far more debt). The study’s conclusion:
The top income tax rates have changed considerably since the end of World War II. 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 average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, 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. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.
When David Leonhardt confronted Paul Ryan (before he was named VP nominee) with a chart showing these correlations, here’s how he dismissed them:
That was precisely the question I was asking Mr. Ryan when I brought him the chart last year. He wasn’t the vice presidential nominee then, but his budget plan has a lot in common with Mr. Romney’s.
“I wouldn’t say that correlation is causation,” Mr. Ryan replied. “I would say Clinton had the tech-productivity boom, which was enormous. Trade barriers were going down in the Clinton years. He had the peace dividend he was enjoying.”
The economy in the Bush years, by contrast, had to cope with the popping of the technology bubble, 9/11, a couple of wars and the financial meltdown, Mr. Ryan continued. “Some of this is just the timing, not the person,” he said.
He then made an analogy. “Just as the Keynesians say the economy would have been worse without the stimulus” that Mr. Obama signed, Mr. Ryan said, “the flip side is true from our perspective.” Without the Bush tax cuts, that is, the worst economic decade since World War II would have been even worse.
But we have no evidence that tax cuts spur job growth, especially when they’re so small and tax rates are already at historic lows. As Andrew Sullivan points out, “bringing a tax rate of over 70 percent way down to the 30s can make a big difference” but, “Once you’re in the 30s, the ammunition is much much smaller.” And since the ultra rich — the “job creators” — get more than half their income from capital gains, taxed at only 15%, cutting the marginal top rates has little effect.
Derek Thompson sums it up:
Does this story prove that raising taxes helps GDP? No. Does it prove that cutting taxes hurts GDP? No.
But it does suggest that there is a lot more to an economy than taxes, and that slashing taxes is not a guaranteed way to accelerate economic growth.
And here’s where Paul Ryan has a small point, though he refuses to follow it to its logical conclusion. He’s right that other factors have a large effect on economic growth, both for the better and the worse, so a mere correlation between tax rates and growth doesn’t necessarily prove anything. He’s right that in the 1990s, the tech boom was a big reason why the economy boomed and that raising the top tax rate by a few percent did not actually create that growth. There are so many other factors that are far more important when it comes to economic growth — currency values, booms or busts in other countries that help or hurt the export sector, interest rates (though here again, they’re already so low that they are essentially meaningless now as an input to growth), the amount of money in circulation, technological innovations, productivity growth, and a dozen other things.
But what it does show is that raising or lowering the marginal tax rates has little to do with growth in GDP or employment because those other factors dwarf their influence over demand and spending. And that’s exactly why it’s absurd that cutting marginal tax rates is the only economic plan the Republicans have, or have had, for decades now. It’s like the owner of a sports team saying that the key to getting attendance up at their stadium is the brand of mustard they use on their hot dogs — there are a hundred factors far more important than that, all of which they are ignoring.