Well, there you go again. W's Dad was right 32 years ago.

Well here we go again

If I told you that there was an organization that offers Congress research and analysis on all current and emerging issues of national policy. That it offered timely and confidential assistance limited only by its resources and the requirements for balance, non-partisanship and accuracy.  That its responsibility was to ensure that Members of the House and Senate have available the best possible information and analysis on which to base the policy decisions the American people have elected them to make and that in all its work and their analysts were governed by requirements for confidentiality, timeliness, accuracy, objectivity, balance, and non-partisanship.  

 Then I would be describing the Congressional Research Service (CRS).  The CRS basically serves as Congress's think tank, and is the public policy research arm of the United States Congress.  (There are two other major congressional agencies that support Congress as well; the Congressional Budget Office (CBO) and the Government Accountability Office (GAO).

The CRS recently issued a report “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945” that concludes that tax cuts don’t lead to economic growth.  I assume that if you believe in supply side economics you would disagree with the above conclusion but as the late senator from NY, Daniel Patrick Moynihan once said “Everyone is entitled to his own opinion, but not his own facts.”

So here are the facts.

The report’s starting premise was that long term debt will be the country’s greatest priority.  That debt reduction would require increased tax revenues, reduced government spending, or a combination of the two. If increased tax revenue is part of long-term deficit reduction, expanding the tax base, raising tax rates or a combination of the two would be required.

The arguments are summarized as such “Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity. 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”

The report examined “individual income tax rates since 1945 in relation to these arguments and seeks to establish what, if any, relationship exists between the top tax rates and economic growth. The nature of these relationships, if any, is explored using statistical analysis.”

The statutory top marginal tax rate was over 90% (actual average tax rate was 60%) in the 1950s.  That covered the top 0.01% of the population.  It fell to 24.2% by 1990.  The average tax rate for the top 0.1% was 55% in 1945. It also fell to 24.2% by 1990.  Between 1990 and 1995, the average tax rate for both the top 0.1% and top 0.01% increased to about 31%. After 1995, the average tax rate for the top 0.01% was lower than that for the top 0.1%.  

Figure 1 from the CRS report

 The capital gains tax rate has had less variation but has decreased as well.  From 25% to 35% reduced to 20%, increased to 28% and then reduced to its current level of 15%.

So I will provide some of the key findings from the report.  If you are interested in reading it here is the link

 http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf

Productivity and Growth – the data suggest that the top marginal tax rate has a slight positive association with productivity growth while the top capital gains tax rate has a slight negative association with productivity growth. The regression analysis, however, does not find either relationship to be statistically significant, suggesting the top tax rates are not necessarily associated with productivity growth.

Real Per Capita GDP Growth- The top marginal tax rate in the 1950s was over 90%, and 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 top marginal tax rate was 35% while the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.......the association between GDP growth and the top tax rates is not strong. The statistical analysis using multivariate regression does not find that either top tax rate has a statistically significant association with the real GDP growth rate.

Top Tax Rates and the Distribution of Income - It is recognized that measure of U.S. income disparities have increased over the past 35 years. According to income tax data, average inflation-adjusted or real income increased by 116% (that is, about doubled) since 1945. Average real income increased by 395% for the top 0.1% and by 692% for the top 0.01% over this period. Average real income for the balance of the top 1% in the income distribution (i.e., all but the top 0.1%) increased by about 165%. The share of income going to the top 1% increased from 12.5% in 1945 to 19.8% in 2010. Three-quarters of this increase in income share went to the top 0.1%. 

….there is a strong negative relationship between the top tax rates and the income shares accruing to families at the top of the income distribution. These results suggest that as the top tax rates are reduced, the share of income accruing to the top of the income distribution increases—that is, income disparities increase. The regression analysis results show that these relationships are statistically significant. 

Income disparity figure from the CRS report

Research has shown that changes in capital gains and dividends were the largest contributor to the increase in income inequality since the mid-1990s. Capital gains and dividends have become a larger share of total income over the past decade and a half while earnings have become a smaller share.

Concluding Remarks - 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.

So you may not have heard of the report because under political pressure from the Republicans the CRS withdrew the report.   According to an article in the NY Times http://www.nytimes.com/2012/11/02/business/questions-raised-on-withdrawal-of-congressional-research-services-report-on-tax-rates.html

Withdrawal method

Congressional aides and outside economists said they were not aware of previous efforts to discredit a study from the research service. “A person with knowledge of the deliberations, who requested anonymity, said the Sept. 28 decision to withdraw the report was made against the advice of the research service’s economics division, and that Mr. Hungerford stood by its findings.

I guess the CRS report confirms what George W Bush’s father said 32 years ago.  George Bush Sr. was running for president in 1980 against Ronald Reagan.  Bush called Regan’s economic policies “voodoo economics”.  Reagan won the presidency and the “Father” of “Supply Side”, “Trickle Down” economics introduced America to Reaganomics and as they say the rest is history.  The very history that the CRS analyzed and concluded that doesn’t work.  So it is no surprise that Reagan’s party would try to suppress that report.
Lowering Taxes does not spur the economy.  Taxes have been trending down for 65 years.  Taxes have been historically low for the last 12 years.  The income disparity has greatly widened.  The number of jobs have decreased.  The data is very clear.
The deficit needs to be lowered by cutting entitlements and raising taxes on the rich.