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Low taxes: No magic fix

By Kay Bell · Bankrate.com
Tuesday, September 18, 2012
Posted: 3 pm ET

Lower tax rates will increase saving and investment, boost productivity and generally lead to more robust economic growth, creating a better economy for everyone.

Wrong, according to an analysis by the Congressional Research Service, or CRS.

"There is not conclusive evidence … to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth," writes CRS public finance specialist Thomas L. Hungerford in a report released last week.

Hungerford examined, per the title of the CRS report, economic data and the top tax rates since 1945. That analysis, he says, "suggests the reduction in the top tax rates have had little association with saving, investment or productivity growth."

Here's the historic tax perspective used by CRS.

Throughout the late-1940s and 1950s, the top marginal tax rate was typically higher than 90 percent. The current top individual tax rate since 2003 and through 2012 is 35 percent.

As for investment income, the top capital gains tax rate in the 1950s and 1960s was 25 percent. It jumped to 35 percent in the 1970s. Today (and through the end of this year) it is for most investors 15 percent.

Now for the economic numbers.

CRS says the real gross domestic product, or GDP, growth rate averaged 4.2 percent and real per capita GDP increased annually by 2.4 percent in the 1950s. In the 2000s, the average real GDP growth rate was 1.7 percent, with real per capita GDP increasing by less than 1 percent per year.

So when the top tax rates were near 100 percent, the GDP growth rate averaged more than 4 percent. And with rates cut by almost two-thirds in the last decade, the average GDP growth rate was less than half the 1950s rate.

OK, before the nasty emails start, the CRS report also says that even though tax cuts at the top don't necessarily jump-start the economy or keep it racing along, they don't hurt it either.

There are, obviously, a lot of factors involved in getting to a strong and stable economy.

And that's CRS' and my point. There is no low-tax-rate magic bullet to fix and keep an economy strong.

One thing that CRS did find, however, is that lower tax rates on high earners do lead to an increased concentration of income at the top of the income distribution scale.

Not to pick on the CRS, which as the nonpartisan research arm of Congress is widely respected, but duh.

Apparently, though, a lot of people need reminding of this, as well as to what such a concentration of wealth does.

"The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie," says the report, "but there may be a relationship to how the economic pie is sliced."

Or, to paraphrase an old saying my grandfather often repeated, lower top tax rates help the rich get richer and the poor get poorer.

And that leads me to another family favorite old saying: Those who don't learn from history, and that includes tax history, are doomed to repeat it.

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1 Comment
haha
September 22, 2012 at 3:19 am

Riiiiight, after working for this money, the government knows how to spend it more wisely than I would. They take these tax dollars and spend them for political purposes (entitlement programs, sweet heart contracts to companies), I spend my money to grow my quality of life to avoid needing to be on the dole. $100 more a month I get to keep from my labor would be used for paying down debts faster, growing my savings, investing, and maybe just treating myself to something as simple as a movie and dinner or as major as a house/auto purchase. $100 more a month to the government has a portion of that towards interest generated on a HUGE DEBT BALANCE, and then spent on bridges to no where, drone strikes in Pakistan, people not working in 99 weeks, and susidies to corporations