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  • Congressional Research Service Wrongly Implies Lower Tax Rates Don't Strengthen Economy

    The Congressional Research Service (CRS) set out to make a convincing case that lower income tax rates do not strengthen the economy. It failed, but in so doing, it called into question the quality of CRS analysis and the institution’s credibility as non-partisan.

    The CRS is supposed to provide expert, objective, non-partisan research analysis to Congress. Most of the time, the CRS performs this function admirably and diligently; the longstanding episodic exception has been in tax policy. The most recent example of this partisan divergence is a report setting out to do the impossible: use historical data to argue that lower rates do not encourage stronger economic growth and, by implication, that higher marginal tax rates such as those espoused by President Obama do not discourage economic growth.

    The CRS report presents a slew of periods between 1945 and 2010 comparing the top marginal income tax rates and capital gains rates with economic growth rates. From these correlations the author concludes that lower rates do not correlate with stronger economic growth.

    In fact, these stylistic correlations prove nothing. In short, the economy is more complicated than this simplistic approach can acknowledge. For the analysis to prove anything, it needed to account for countless other economic and policy factors, many specific to a given period, and determine how those factors influenced economic growth in the period in question. With this as background, the analysis would then have to isolate the effect lower rates had on growth.

    CRS, and many others that argue against lower tax rates, mislead when they make such flimsy correlations because they fail to disclose that no two time periods are the same. Comparing 1950 to 2010 just on tax rates is ludicrous. The world and tax policy are entirely different in those timeframes. If CRS tried to account for all the differences, and then determine how tax rates influenced growth, it would find a different and more accurate answer: that lower rates encourage growth.

    There is little doubt about this. One need only look at how liberals approach tax policy when it comes to behaviors they don’t like. For instance, when it comes to energy consumption, carbon production, cigarette smoking, and countless other liberal bugaboos, their answer is always the same: Raise taxes on the behavior to cause people to cut back on it. Liberals can’t seem to apply the straightforward converse of this logic to economic growth, for some reason.

    Of course, if you tax income, investment, and savings less you’ll get more of them and the stronger growth that comes with the increase in these activities. And if you raise tax rates on those most able to react, then the reactions will be that much more pronounced. Upper-income taxpayers have the most capacity to adjust their behavior; by shifting the composition of their labor income to avoid tax, to shift the composition of their investments to avoid tax, or to shift away from work effort toward leisure.

    It is vital that the public, the media, and, most importantly, policymakers don’t fall for misleading analysis, even when it comes from an otherwise credible source. The economy is in bad shape and will remain that way unless and until it gets better policy from Washington. One of those policy improvements would be lower tax rates through tax reform.

    Posted in Economics [slideshow_deploy]

    13 Responses to Congressional Research Service Wrongly Implies Lower Tax Rates Don't Strengthen Economy

    1. Suhel Singh says:

      I agree that the CRS analysis doesn't prove that lower tax rates bare no relation to savings, investment, or productivity gains. However, they do reveal the statistical insignificance between lower marginal rates and growth. Simply, there are several other factors that effect savings, investment, productivity, and growth more than lower taxes – and that is clearly visible in the graphs provided in the report. Reducing taxes without cutting spending, or reducing marginal rates without accounting for lost revenue will obviously improve savings and investment, but so will deficit spending for that matter. Why are lower marginal rates better than discretionary spending? That would be a much stronger argument for this article.

    2. jill levine says:

      I see, so when you disagree with something you call into question it's validity?

    3. Alberto Knox says:

      Cutting taxes as a cure-all isn't "simplistic?"

    4. d. auge says:

      If the report is so obviously wrong why don't you have a link to the 'research' backing your, allegedly, more 'sophisticated' claims instead of the bait-and-switch to flat-taxes? Could the Heritage Foundation even produce an iota of unbiased research? This is a Think Tank? More like a golden dog bowl…

    5. John s. Thomas says:

      This morning I read an editorial in the local paper reporting that the CRS found no evidence that tax rates do not affect economic growth. This flies in the face of simple logic. My local paper has a strong liberal bias but I expect much better of the Congressional Research Service. I am pleased you are on top of this.

      • Zakk says:

        If "simple logic" were to be applied, we might still believe that the earth is flat. Intuition is not always the best indicator of fact. Unless some source similarly non-partisan can produce a similar analysis, we must accept the conclusions of the CRS report.

        The current employment problem is lack of demand, not lack of capital. There is plenty of capital to go around. Businesses are not going to expand if there is no demand. Corporations are sitting on trillions of dollars. Lower taxes will not entice them to employ people. Lower taxes on the middle class is another matter since they will (and certainly have the need to) spend it — hence demand! The middle classes and the economy can also benefit from higher wages — hence higher demand!

    6. Ron says:

      If high taxes suppressed the economy and job growth, New York City would be a barren wasteland.

      • Randy says:

        But isn't the author here making a different point, namely, that New York City could be more prosperous and productive if it reduced taxes? I think he is saying that some level of taxation is of course needed to provide for government services, infrastructure, etc. But high tax rates tend to discourage productive economic activity. It seems like Democrats (and even many liberals) used to realize this; they just wanted tax rates to be "little" higher than they are now, and then "only" for the rich. But now the left has gotten so far off the track they are arguing that taxes bear zero relationship with economic growth. Nutty.

    7. Marko Lenzek says:

      Mr. Dubay wrote: "Of course, if you tax income, investment, and savings less you’ll get more of them".

      Mr. Dubay sounds like an Austrian economist. If you take that as an axiom, or course lower tax cuts on the rich work. But it is not an axiom, you need to prove that it.

      The CRS report provides evidence that the alleged axiom is false. Mr. Dubay provided no evidence other than religious belief, to counter the CRS.

      • Randy says:

        But didn't he say that liberals use taxes all the time to deter behavior they don't like? Isn't that evidence that if you tax a good or an activity, you tend to get less of that good or activity? Or do you think liberals are Austrian economists?

        • Gordon says:

          Buying cigarettes and investing are two completely different things. If you have a business and you have more demand, are you not going to expand just for the fact that you will pay a few points higher in taxes? No, profit is profit, expansion is expansion even if it is at a slightly lower rate.

    8. Richard says:

      A rational actor will seek to maximize his profit. His profit-maximizing activity does not change when the tax rate changes, unless he emigrates. If he stays in this country, he'll do the same thing with a high tax rate that he would do with a low tax rate.

      The argument for low tax rates is really just based on greed, not economics.

    9. Steve R says:

      Mr. Dubay says, "Upper-income taxpayers have the most capacity to adjust their behavior; by shifting the composition of their labor income to avoid tax, to shift the composition of their investments to avoid tax, or to shift away from work effort toward leisure."

      This is one of the best arguments for equalizing the capital gains and earned income taxes that I have ever seen. If the "job creators" paid the same tax on all income, regardless of source, there would be no reason for shifting.

      This is also a great explanation of why higher top marginal rates increase employment. If the top marginal rate were 75% then it would make economic sense to hire more people, since the cost of doing so would be only 25% due to tax savings. If total costs for each new employee are $100,000, and each employee returns only $50K, it doesn't make sense to hire. But if the IRS is going to take $75K, than the net cost drops to $25K with $25K of profit per employee.

      The strongest argument in the CRS report is that the benefits of historically low taxes are simply being hoarded, depriving the economy of much needed cash. Tax cuts only lower revenue for everyone.

      Of course the real question is how the GOP ever thought they could get away with trying to squelch this.

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