Congressional Research Service: Tax Cuts for High Earners Do Not Spur Economic Growth

Parsing the language of otherwise dry, bureaucratic legalese is particularly important in periods when there is little agreement about the meaning of non-partisan research data.

Emotions have run wild for the past couple of decades as competing ideologies heatedly debate the world's economic future. The prevailing ethos has been that lower taxes and the austerity policies that result will ultimately prove more beneficial to job and wage growth than the alternatives.

There has been little evidence to support that point of view in the short term. And in the long term we're all dead, so patience is thin these days.

The Congressional Research Service is a rigidly non-partisan arm of the US Congress whose role is to produce studies of pristine quality on whatever subjects its bosses - the Members of Congress - want. In this report it has employed the language of statistics to convey its meaning.

One of the orthodoxies of recent economic discourse in the political context has been the beneficial impact - or lack thereof - tax cuts on the wealthiest members of society. We will not indulge the pros and cons of those positions as they can be found in multiple sources. The CRS has entered the fray by asserting that its analysis shows there is no correlation between such cuts and desired growth. The use of the statistical term ' correlation' is important. Because a correlation is a statistical relationship. It does not infer dependence. So that makes it weaker than causality (as in, tax cuts for the rich causes economic growth). In other words, such tax cuts do not provide evidence of a relationship, let alone that the former causes the latter.

Not that this will change anyone's mind, necessarily. But it does suggest that some central tenets of the public policy debate may be in for further consideration - and that that may have to be factored in to business scenario planning. JL

Sahil Kapur reports in TPM:

There is no clear correlation between tax cuts for high earners and economic growth, according to a new study by Congress’ nonpartisan policy analyst. “There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth,” concluded a report by the Congressional Research Service released Friday. “Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.”

The findings are pertinent to a central debate in the presidential election, wherein President Obama is pushing to end the Bush-era tax cuts on high incomes, while his Republican challenger Mitt Romney insists on cutting rates across the board 20 percent below current policy. Democrats contrast the tax hikes of the 1990s and ensuing economic growth with the tax cuts of the 2000s and relatively meager gains that followed. Republicans, meanwhile, argue that the recovery is weak because the economy remains shackled by regulatory and tax burdens.

The study delves into the last 65 years of U.S. tax policy pertaining to high earning Americans — including top marginal rates on income and capital gains taxes — and how it impacts their decision-making. The conclusion: cutting effective taxes on the rich doesn’t boost economic growth, but it does correlate with rising income inequality.

“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 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%,” wrote Thomas L. Hungerford, CRS’ specialist in public finance and author of the report.