Thursday, April 25, 2013

Tax Rates and Growth: What the data actually says

Cartoon of Adam Smith and John Maynard Keynes confusing Bill O'Reilly
Cartoon of Adam Smith and John Maynard Keynes
confusing Bill O'Reilly. (By rrllmm392 via Flicker.com)

News flash: Washington is crazy. And very often, it seems like they reject our desires. 


But, quite often, the government does do good work. And one of those bits of "excellent work" was the Congressional Research Services (CRS) 2012 research paper: Taxes and the Economy.

This paper is amazing, and does perhaps the finest job I have ever seen in asking quite frankly the question that has most of us puzzled: "What impact does the cutting of top tax rates have on the economy?" And in a few quick pages, divulges the following facts.

Overview of the CRS's findings in Taxes and the Economy.


  1. Top-Tier Tax Rates & Their Effect on GDP Growth 
    • Higher tax rates for the top 1% are weakly associated with faster GDP growth.
    • Lowering those rates leads to a slight decrease in associated GDP growth
  2. Lower Top-Tier Rates Produced only 1 Verifiable Effect
    • Consolidating income towards the top..
    • This is accomplished by redistributing wealth from the lowest two quintiles, and moving that wealth to the wealthy.
Ironically, these findings directly contradict many neo-Con fiscal policies that have been popular since Reagan. However, this has not stopped the GOP to continue to insist that "Tax cuts create prosperity. Which they do not. And yet, like I pointed out in my earlier article on the Laffer Curve, the GOP and most neo-Cons seem willfully ignorant of the import of the studies that prove their economics "incorrect."  

I would run some figures, but know that numbers often causes people's eyes to gaze over. So I took the liberty to cop a few graphics from the CRS that illustrate the real impacts of these largely destructive policies are having on the nation.

First off, let's look at the history of both the top-tier Average Tax Rates, as well as the Capital Gains Tax Rates, since the wealthy garner the majority of capitol gains (See Fig. 1).  

Notice that those rates have fallen considerably over the years. Especially from 1980 onwards, and the new neo-Con orthodoxy -- called Reaganomics, began to hold sway.

Notice that During the Clinton years, the rates were much higher than they are today. The Bush Tax Cuts of 2001 and 2004 have lowered those rates considerably. There is a solid argument that this is the cause of the deficit. Since the government is still pretty much "about the same." But the Federal income stream has slowed.
Fig. 1: Historical Trend of Top Marginal And Capital Gains Tax Rates, 1945-2011 (CRS)
Fig. 1: Historical Trend of Top Marginal And Capital Gains Tax Rates, 1945-2011 (CRS)

Next, Let's Look at The Tax Rates' Impact on GDP Growth (See Fig. 2)

The argument from the Supply Siders is that tax cuts will stimulate growth. This seems reasonable. But when you look at the data, there is actually a weak negative correlation between tax cuts and slower economic growth. 

That is correct. This flies directly in the face of neo-Con orthodoxy. 

Fig 2. The weak negative correlation between Top Marginal Income Tax rates and Real GDP Growth. Note the  even weaker impact of Capital Gains rates and growth. (CRS)
Fig 2. The weak negative correlation between Top Marginal Income Tax rates and Real GDP Growth. Note the
even weaker impact of Capital Gains rates and growth. (CRS)
And, Lastly, Let's Examine the Impact of Reaganomics on Income Distribution.


Fig 3. The very strong correlation between Top Marginal & Capital Gains tax rates (CRS)
Fig 3. The very strong correlation between Top Marginal & Capital Gains tax rates (CRS) 
  

Conclusion

As they say in AA, we all have the right to disagree in our opinions. But not in our facts -- since, all things being equal, facts just are. 


I think that a quote from the physicist Richard Feyman from his report to NASA and Congress on the Challenger explosion. 
"For a successful technology, reality must take precedence over public relations, for nature cannot be fooled."
Now granted, he is talking about physical sciences and not economics. But it does seem to me that his strict, scientific approach to the evidence -- "Just the facts, ma'am" -- is what our nation needs in this time of crisis.

To me, a relatively rational, objective observer sitting on the outside, it appears that the moneyed interests within the GOP are intentionally advancing an agenda that clearly benefits them, usually to the detriment of the rest of us. Which I am okay with. But the problem is that they are not being honest with their constituents, most of whom are voting for policies that actually hurt them in both the long-run and the short-run.

This is an opinion. But it is an opinion based on observable facts.

And the funny part is, this is being done in plain site. Without an conspiracy -- even Romney's boorish "47%" comment was made pretty openly and in a semi-private setting.

For those of us who love our country, but wonder why we're working longer to get less, I'd start looking here. Because every tax dollar that is redistributed to the wealthy is a dollar that cannot be spent on schools, roads, research and to implement a solid safety net similar to those in Europe and Japan. And that, to me, is tragic.

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