Reductions in the tax rate for the highest-earning individuals and corporations do not spur economic growth, a recent report shows, contradicting the political rhetoric that insists low tax rates for “job creators” are necessary for a healthy economy.
A new report released on Friday by the Congressional Research Service found that reductions in the top marginal tax rate and the top capital gains tax rate do not have a significant impact on economic growth.
“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,” wrote Thomas Hungerford, a specialist in public finance for the CRS and the author of the report. “Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment or productivity growth.”
The findings, which were reached using statistical analysis of the U.S. tax system beginning in 1945, compared the tax rate for the highest income-earners in the 1940s, which was 90 percent, with the present highest tax rate, which was 15 percent.
The study then compared the percentage of gross domestic product growth to the marginal tax rates, finding no significant correlation between the two.
Hungerford wrote that the top tax rate reductions are, however, associated with an increasing concentration of income for the top income class.
“The share of income accruing to the top 0.1 percent of U.S. families increased from 4.2 percent in 1945 to 12.3 percent by 2007,” he said in the report.
In an August poll by the Pew Research Center, 58 percent of respondents said wealthier citizens pay too little in taxes.
President Barack Obama proposed higher tax rates for those making $250,000 and more in July, but no legislation has been passed.
However, Republican presidential candidate Mitt Romney has said in the past that tax hikes choke off economic growth.
Sambuddha Ghosh, an assistant professor of economics at Boston University, said in an email that this is a case in which people need to look at the data and see what is actually happening.
“One case that the Republican side is often trying to make is that we should not tax the rich more because they would cut back on investment and jobs, to the detriment of the common man,” Ghosh said.
Economic theories state that tax hikes will reduce income concentration for the rich, Ghosh said, and that this will force people to cut back on productive economic activities such as purchasing luxury items.
Ghosh said the real way to grow the GDP is not through low marginal tax rates, but through innovation and technological changes.
“The statistical analysis using multivariate regression does not find that either top tax rate has a statistically significant association with the real GDP growth rate,” he said.
Rosella Capella, an assistant professor of political science at BU, said in an email that more tax revenue would be good for the country.
She said the recent announcement by the Federal Reserve to engage in quantitative easing would keep interest rates down, encourage lending and keep U.S. debt costs low.
However, when the economy begins to grow, she said, “the Fed will have to choose between raising interest rates to lower inflation or increasing the cost of our debt.”
“One way to avoid this problem is by raising taxes,” she said.
Capella said a progressive tax system would help fight the rising U.S. debt.
“A more balanced budget through increased taxes is definitely in our interest,” Capella said. “Increased tax revenue will allow the U.S. to pay back costly debt sooner at a lower price. In sum, by increasing taxes the U.S. government can avoid relying on a potentially dangerous monetary policy.”