Popping the bubble: more data that bursts commonly-held GOP tax beliefs

We’ve talked about this on more than one occasion, but the data shows that many conservative/Republican talking points on tax policy just don’t reflect reality.  Let’s look at some (relatively) new data on this subject that continues the trend.

A recent study by the Congressional Research Service (CRS) looked at the effects of the top marginal individual income on various measure of economic growth.  As the study itself concluded:

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. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

Here are two graphs from the study that give a little more color on that conclusion.


This graph plots GDP growth against the top marginal and capital gains tax rate going back to 1945.  Note that the trendline on both graphs is essentially flat.  That represents the fact that as the tax rate increases, GDP growth is unaffected.  In fact, the right graph (which looks at the capital gains tax rate) shows that higher capital gains taxes correlate to higher GDP growth.

This graph shows how the lower top marginal tax rates work to change the distribution of income — favoring the most wealthy in society.  Each graph shows that lower tax rates result in higher concentrations of income at the top of the income scale.

What happened when the CRS tried to release this study?  Senate Republicans had it killed.  After all, if their narrative is found to be untrue, it pretty much undercuts their entire reason for existence at this point.

Well, that, and the unending Republican desire for cutting taxes on corporations. Well, a Congressional Budget Office study from earlier in the year shed some light on that situation.  In 2011, corporate taxes as a percentage of profits hit a 40-year low.

Some of this drop in recent years can be attributed to temporary measures (such as a change in depreciation rules) that were part of the stimulus package, but overall, the tax environment for business has been getting more friendly over recent decades — not less.

Republicans and Democrats should work together to find solutions that will make our tax code simpler and fairer — and I believe there are significant areas of agreement to be found there.  But if we’re going to have solutions that really work for all Americans, we need to start with a real understanding of the facts and not persist with myths, talking points, and empty rhetoric.


22 Responses to “Popping the bubble: more data that bursts commonly-held GOP tax beliefs”

  1. Yay, we can apparently be taxed into prosperity! Let’s all pay more taxes so we can all imporove the economy! After all, everyone does better with less money thier pockets. More taxes for everyone!!

    • As per usual, you’re not getting the point. The point is that tax policy is not the one critical piece that drives prosperity. In fact, tax policy is pretty neutral. Considering where we are at with tax rates in this country, changes in them are not going to be huge drivers either way. Going back to 39.6% from 35% for income above $250,000 or $1 million or whatever the number turns out to be isn’t going to tank the economy. If tax rates were where they were in the Eisenhower days, then,, yes, a tax cut might be a huge driver.

      We need to focus on pulling the other levers that are available to us to improve the economy. And we’re all going to have to sacrifice to close the deficit over time.

      • I find it interesting that JFK disagreed. It’s also very plain that this study oversimplifies tax implications on the economy. For example, if one is to assume that the Bush tax cuts didn’t stimulate the economy, then that means for all tax brackets, and all tax brackets, not just the top bracket, were ineffective. And it ignores all of the other numerous factors that come into play when dealing with our economy.

        • When JFK cut taxes, the top marginal tax rate was 91%. And he cut it to 77%. That’s a far different situation than what we have today.

          Your last sentence gets to the point — we need to be far more focused on the other numerous factors than tax policy. Tax policy, all things considered, isn’t terribly important toward driving economic growth given that we’re talking about relatively small differences in current and proposed tax rates.

          • The problem is that there isn’t enough money that can be taxed from the upper few percent to even make a tiny dent in the deficit. Unsustainable growth is our problem, not low taxes. You make these wild assumptions that we can tax our way out of this mess. We CAN’T. It’s not even remotely possible. We have to reign in spending. It is the only path forward.

            • Where have I said that “we can tax our way out of this mess”? And no one has claimed that raising taxes on the wealthy is the one solution for the deficit.

              Let me know when you’re done constructing strawmen, and we can have a real conversation about the issue at hand.

              • The rich aren’t paying their fair share, is the real strawman here, we need more tax payers, not class warfare. Ernst and young, (hardly a right wing outfit) has run the numbers and say that the tax increase will cost the economy 710,000 jobs http://blog.heritage.org/2012/07/18/ernst-and-young-obamas-tax-increase-would-kill-710000-jobs/

                • Increasing the tax rate should actually improve incentives for hiring, not the opposite. As businesses are only taxed on their profit, hiring employees reduces profit and therefore tax liability.

                  • That is insane, i have been signing the front of paychecks for over 20 years, no one hires someone for a tax right off, i hire people to help me perform my services offered to my customers. and hope that after all my costs there are profits period. those profits don’t go into building mansions or buying luxury autos, for most business people, profits go back into the business. higher taxes mean lower profits which means less hiring. thats the way it works in the real world. you might be predisposed to not ever see that, but that my friend is the Gods honest truth.

                    • Now you’re onto something. Hiring decisions are made based on demand, not tax rates. But you’ve got the math backwards. Your profit comes before taxes, not after. If you’re telling me that you’re going to forego hiring an additional person needed to service your customers and grow your business because you’re only going retain 60 cents of profit versus 65 per dollar (and that’s only on your profit over $250K) , I would question your business acumen.

                    • OK, with your logic lets raise taxes back to 90% that will really spur on hiring. read the link I provided that might help you see how the real world works. for a sole proprietor like myself the profit that matters is what is left after Uncle sam confiscates his cut, if I were to buy into the notion that hiring for a tax right off was good business, I wouldn’t have lasted a year. the long and short of it is if you need to cut costs because taxes are eating profits, business learns to do more with less, that almost always equals layoffs.

                    • So raising taxes on your profit over $250,000 is going to dramatically change the way your run your business?

                    • No, not at all. I just can’t disagree more when you said higher taxes would spur hiring because employers would be looking for expenses to knock down the amount of profit to be taxed. that is total fantasy

                  • I’m not saying it would necessarily improve hiring. I’m saying that it’s not an irrational tax avoidance strategy — if avoiding taxes is your primary goal.

                    And, of course, tax avoidance shouldn’t be the primary goal of any business.

              • But you see the deficit is what is driving the poor economy. This endless fiscal cliff breeds economic uncertainty. And therefore you can change the tax code all you want, and the economy is only going to remain stagnant. We fight to keep taxes low for survival of American business and the American family, and the government just continues to make it harder and harder by ruining the value of the dollar through horrible fiscal policy. This report is useless because it there is no longer correlation between anything it mentions. Lower taxes mean longer survival times until the government gets its lousy act together. Get this one thought through your head. Our federal government is no longer sustainable. Stealing more money from anyone isn’t going to even remotely solve the economic woes nor the deficit. One can no longer fixed without the other. We’ve crossed the line. We’re doomed.

                • The “fiscal cliff” isn’t a cliff, for starters, and if you’re complaining about the uncertainty created by it — well, that falls on your party. Your party passed the Ryan budget, then refused to raise the debt limit to accommodate the very debt they voted to add. Which led to the supercommittee, which led to the sequestration that we’re now facing.

                  I agree that in the medium- to long-term that we need to do some serious reform and cut a lot of spending. However, the thing to do right now is to make sure that recovery sustains and accelerates. The Cameron government in Great Britain has learned the hard way the cost of austerity — a double-dip recession that has a real possibility of going triple-dip.

                  • I’m too the point where I don’t give a flying shit whether they raise my taxes or not anymore. the sooner it happens, the sooner we can see that it will drive us further into fiscal decay. The debt will continue to skyrocket, and the destruction of big government will become more necessary. Unfortunately, it means we’re all screwed, but we might as well see that now, and stop this stupid class warfare BS. Because at this point, every single American is deep doo doo. the Democrats can’t even create a budget for crying out loud. But somehow they can fix the economy! What a ridiculous load of nonsense. Screw it. Tax all of us at 90%. It really will only accelerate the inevitable. We drove over the fiscal cliff when we first elected this buffoon. He’d rather pit Americans against each other than solve a single problem. 4 more years of this, and Greece will look like New Years Eve party.

                    We need a Regan moment. Mr. Obama, tear down this deficit.

                  • That is very misleading at a minimum, Dems had total control and could raised the debt limit but decided not to for political reasons. just like the Senate hasn’t put forth a budget for political reasons, Dems wanted to muddy waters and paint opponents as obstructionists as a political strategy because running on their true beliefs and record would have surely been a loser

                    • Republicans chose obstructionism as a strategy. It’s not “strategy” to point out that McConnell’s Senate Republicans have filibustered at 2x the rate than the “obstructionist” Daschle Senate of the early 2000s. It’s facts.

                    • Its clear we won’t see things the same. i view what Obama and the Dems did with healthcare after the people of Mass. gave Ted Kennedys old seat to Scott Brown for the sole purpose of stopping it as so poisoning the well it will take many years to get beyond. i doubt you feel the same. anyway its nice to have a local venue to exchange ideas and i thank you for all the work you put into it.

                    • What? Democrats were supposed to abandon health care reform because they were down to 59 seats in the Senate instead of 60? Sounds like you hold the parties to two different standards.

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