Study: Tax Cuts for the Rich Don’t Spur Growth - U.S. Business News - CNBC

Study: Tax Cuts for the Rich Don’t Spur Growth - U.S. Business News - CNBC

I have written several times about tax rates, especially the historical levels of taxation and how those rates of yesteryear are often misunderstood or misrepresented.

While the "90 percent" tax rate was the top marginal rate for a few years, it was also during a time when everything and anything seemed to be deductible. The effective rate for top-income earners has been relatively consistent. This means that rates, overall, have had little economic effect. When rates are increased, so are those magical loopholes (deductions) and when rates are lowered, Congress has had a tendency to close loopholes.

I've long argued that a simple tax code, with minimal loopholes/deductions is the best approach. It might leave some accountants and tax attorneys looking for new lines of work, but that's a small price to pay for a sane tax code.

Now, we know that neither tax cuts nor modest increases at the higher end have any statistically significant effect. Consider the following from CNBC:
The CRS [Congressional Research Service] study looked at tax rates and economic growth since 1945. The top tax rate in 1945 was above 90 percent, and fell to 70 percent in the 1960s and to a low of 28 percent in 1986. 
The top current rate is 35 percent. The tax rate for capital gains was 25 percent in the 1940s and 1950s, then went up to 35 percent in the 1970s, before coming down to 15 percent today — the lowest rate in more than 65 years.
The problem with the top marginal rates is that they don't reflect reality. As I've written in the past:
Allow me to introduce you to Hauser's Law. Published in 1993 by William Kurt Hauser, a San Francisco investment economist, Hauser's Law suggests, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." This theory was published in The Wall Street Journal, March 25, 1993. For a variety of reasons, we seem to balance tax collections within a narrow range. 
Since 1945, U.S. federal tax receipts have been fairly constant in terms of Gross Domestic Product (GDP), with taxes ranging from 15 to 20 percent of GDP.  
Why does this consistency happen, even with high top marginal rates? Because members of Congress seem to know that higher rates requires "compromises" to pass and be signed into law. Also, there really is a point at which people will move money or change it from income to another form of compensation (bonuses, stock options) to avoid taxes.

As I explained in 2011:
As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income.
Which takes me back to the CNBC article on rates and the economy. If top marginal rates are meaningless, as I have tried to demonstrate, then raising or lowering the rates should have minimal affect on the economy. Sure enough, that's what the Congressional Research Service discovered. Rates at the top didn't matter to the macro economy.
Lowering these rates for the wealthy, the study found, isn't aligned with significant improvement in any of the areas it examined. Pushing tax rates down had a "negligible effect" on private saving, and while it does note a relationship between investing and capital gains rates, the correlations “are not statistically significant,” the study says. 
“Top tax rates,” it concludes, “do not necessarily have a demonstrably significant relationship with investment.”
Not "demonstrably significant" tells us quite a bit. Our tax system is a complex, rigged system, but that's not what this study addresses. What this study tell us is that top income earners are less influenced by marginal rates than politicians of either party might want us to believe. If marginal resulted in more spending and investment, we'd see an economic boom with lower rates. If higher top rates caused people to save and reduce "taxable income" then we'd see a stalled economy when top rates were highest.
The study said that lower marginal rates have a “slight positive effect” on productivity while lower capital gains rates have a “slight negative association” with productivity. But, again, neither effect was considered statistically significant. 
At the same time, liberals have argued higher rates and more government spending produce growth. That's the neo-Keynesian position. But, there's little evidence that it was higher taxes that produced any post economic boom. Instead, other factors were more likely to have created economic growth that coincidentally paralleled higher tax rates (and more deductions, so no real change in effective rates, anyway). As CNBC reports:
Do higher taxes on the rich lead to faster economic growth? Not necessarily. The paper says that while growth accelerated with higher taxes on the rich, the relationship is “not strong” and may be “coincidental,” since broader economic factors may be responsible for that growth.
For example, I have long argued that the boom after World War II had only minimal relation to taxes, unions, or any other internal policies of the U.S. Government. The cold reality is that we were the only major nation not in ruins and that let us thrive until other nations emerged.

When you have no competition, of course you thrive.

The boom of the late 1990s had more to do with technological innovation (and an enthusiasm bubble) than any government policies. There was, for any number of reasons, a tech boom that had been 30 years in the making.

What I will argue is that during a boom you can (and maybe should) have higher revenues. During the 1990s, we reduced the annual deficit (though it was never a surplus, but that's another discussion). In a boom, you should pay off debts, invest in new ideas, and prepare for the next downturn. But, we don't seem to be good at planning ahead.

As always, I argue for a "flatter" tax, fewer loopholes, and serious cuts to government programs. If we won't "cut" in real dollars, then we need to freeze spending — and I mean a real freeze — in return for closing loopholes to increase revenues. What we should not do is raise rates and close loopholes at the same time. Raising effective tax rates would be a serious shock to this economy.

Sadly, I have little faith in Congress or any president to do what needs to be done. Spending is too easy, and reforming the tax code seems an impossible task for politicians. Yet, we know you could reform the code to collect exactly 20 percent of GDP, without any dedications. Imagine a three-rate system, simple and clean. But, it's much easier to scream "Tax the rich!" or "The freeloaders are drowning us!"

Serious discussions aren't going to happen, though.


  1. I don't understand why there is this "problem." I have been reading up on these special 47% of people that don't have to pay taxes and I find it to be extremely unfair. They seem like they're the greatest people because they all donate money to charities and things like that. I would like to do that too, but because of my back taxes, it makes it almost impossible.


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