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Sunday, December 16, 2012

Tax rates and economic growth

Recently there has been some drama around a Congressional Research Service (CRS) report issued in September 2012 that reported that a reduction in tax rates does not correlate with economic growth. The drama was around whether Republicans forced the report to be pulled.  See a New York Times article, "Nonpartisan Tax Report Withdrawn After G.O.P. Protest," by Weisman, 11/1/12. Bruce Bartlett also has an article in Tax Notes (11/26/12) about the drama, noting how the questioning of the report just brought more attention to it that it would have otherwise have received.

The CRS report has now been reissued - Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (Updated), by Hungerford, 12/12/12. It reaches the same conclusion.  Here is an excerpt from the report:

"The results of the analysis in this report 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 statutory 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. But as a small proportion of taxpayers are affected by changes in the top statutory tax rates, this finding is not unexpected.

However, the top tax rate reductions appear to be correlated 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. The statistical analysis in this report suggests that tax policy could be related to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities."

Query - Will this be addressed in the debate as to whether none, 98% or 100% of individuals should have the 2001/2003 tax cuts extended?

What do you think?

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