BOMBSHELL: New Study Destroys Theory That Tax Cuts Spur Growth

Henry Blodget, CEO and Editor-in-Chief of Business Insider.
Source: Business Insider
S
eptember 21, 2012

Tax cuts spur growth.

Most Americans have gotten so used to hearing this theory that they don’t even question it anymore.

One of our two Presidential candidates is so convinced of the theory that he has built his entire economic plan around it–despite the huge negative impact additional tax cuts would likely have on our debt and deficit.

But is the theory true? Do tax cuts really spur growth?

The answer appears to be “no.”

According to a new study by the Congressional Research Service (non-partisan), there’s no evidence that tax cuts spur growth.

In fact, although correlation is not causation, when you compare economic growth in periods with declining tax rates versus periods with high tax rates, there seems to be evidence that tax cuts might hurt growth. But we’ll leave that possibility for another day.

One thing that tax cuts do unequivocally do–at least tax cuts for the highest earners–is increase economic inequality. Given that economic inequality is one of the biggest problems we face in this country right now,  this conclusion is very important.

Before we go to the charts, a few observations.

First, this topic has become highly politicized, so it’s impossible to discuss it without people howling that you’re just rooting for a particular political team. Second, no one likes paying taxes. Third, everyone would like a tax cut, including me.

So I think we can all agree that everyone would prefer that tax cuts actually did spur economic growth.

Alas…

Okay, first let’s look at the top marginal tax rates for the past 60 years or so. These are not effective or average tax rates–they’re just the top marginal rates. As you can see, they’ve trended steadily down:

Top Marginal Tax Rates

Congressional Research Service

And now, average tax rates for the country’s highest earners–the super-rich 0.1% of incomes. These have also trended steadily down:

Average Tax Rates

Congressional Research Service

So, have these declining tax cuts for the rich–the “job creators” who are being given a bigger incentive to invest by the reduced tax rates–led to faster economic growth?

Nope.

The following charts show the correlation between tax rates and economic growth over the periods above. The slope of the solid line in each chart is the key.

The lefthand chart shows that there is no correlation between GDP growth and the top marginal tax rates. The righthand chart shows that there might be a very modest tendency toward faster economic growth with higher capital gains rates. (But those who love today’s record-low capital gains rates will be relieved to know that the CRS does not find this correlation to be statistically significant.)

GDP versus Tax Rates

Congressional Research Service

Along these lines, David Leonhardt of the New York Times recently put together a cool chart showing economic growth rates following periods of tax increases and tax cuts. The chart plots the average future 5-year economic growth rate from each point in time, which is known with the benefit of hindsight. You can see for yourself why Leonhardt (and any other sentient being) would conclude that the evidence does not support the idea that tax cuts spur growth.

Tax rates and Growth

David Leonhardt, New York Times

(By the way, Leonhardt showed this chart to Republican VP nominee Paul Ryan, who, like Presidential nominee Mitt Romney, wants to stimulate the economy by cutting taxes. Ryan’s reaction? “Correlation is not causation.” That’s true. But the point is that there’s not even any correlation suggesting that tax cuts spur growth. It’s just a theory. And it’s a theory that a lot of real world “correlation” suggests might be wrong.)

And now for the really bad news…

Although tax cuts do not appear to spur economic growth, they DO appear to lead to greater economic inequality.

As this chart shows, inequality in the United States recently hit a level that has not been seen since the 1920s: The country’s top earners are taking home more of the national income than at any time in 70 years.

Share of Income

Congressional Research Service

And now let’s look at the correlation between this rise in inequality and tax rates. As you can see, the lower the top marginal rates go (left), the bigger the share of national income that goes to the top 0.1% of wage earners. And it’s the same for capital gains rates.

Share of Total Income vs Tax

Congressional Research Service

Meanwhile, the share of national income that goes to “labor”–a.k.a., most Americans–goes up as the top tax rates increase.

Share Of Income To Labor

Congressional Research Service

Why is the rise in inequality so troubling? Well, beyond the issues of fairness and stability, increasing inequality is hurting the economy. Unlike middle class and upper middle class folks the country’s highest earners don’t spend all the money they earn. So this money doesn’t get circulated back into the economy, where it can become revenue for other companies and salaries for other workers. (If there were a dearth of investment capital, the money might get invested, but we’ve got plenty of investment capital right now. Our problem is a lack of demand).

So, what’s the bottom line?

Well, the bottom line appears to be that low taxes do not spur economic growth and DO cause greater economic inequality.

So, although it sounds like heresy, presidents and Congress-people who actually want to fix the economy might want to consider raising taxes rather than cutting them. Or, at the very least, keeping them the same.

SEE ALSO: EXCLUSIVE: The Romney Plan Will Balloon The Debt And Deficit

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7 Responses to BOMBSHELL: New Study Destroys Theory That Tax Cuts Spur Growth

  1. patj says:

    Seems like Jean can’t handle honest replies to left-wing propaganda, so she deletes the comments.

  2. Larry Cox says:

    In the past, politicians played seriously at being intellectuals.
    Today, most intellectuals don’t even play seriously at being intellectuals!
    True wisdom today has moved so far beyond the old paradigms that anyone on the side of defending the old ways sounds like a fool, especially the politicians, who don’t even try to be intellectually rigorous any more.

    Today spiritual existence is widely accepted as fact, yet there is no place for this in the old paradigms.
    The truth of ET is gaining wider acceptance, and this is really just an offshoot of the whole spiritual awakening. But in the old paradigms, ET does not exist.

    And with these realizations is arising a whole new way of looking at energy production and distribution. It is akin to the pre-industrial model in many ways; it proposes local production and local use. And with this vision could come the end of any “practical” need for centralized power and control, which is the core teaching of the old paradigms.

    Income tax was implemented as a way to extend centralized power and control. It wasn’t really a way to “redistribute wealth” or “level the playing field” or “be fair” or any of those arguments that have been made for it. But at a popular level, everyone believed in those arguments, and many people still do. So they fool around with the tax systems as if it really makes a difference. I don’t think there’s any evidence that taxation is a major factor in business cycles. These are more likely influenced by the behavior of capital. If there were taxes on investing, then you could test that theory.

    My “theory” is that capital is being scared out of its mind by the steady advance of the newer paradigms. Some are trying to ignore them; others are trying to destroy them. And most holders of investable assets are sitting on them in the hopes that they will somehow help cushion the fall as the new paradigms continue to advance. The result has been a huge reduction in lending (investing) into activities that would grow the economy. And I don’t think that will change until certain questions get more firmly resolved. And that resolution is going to be up to the supporters of the new paradigms. So, put on your thinking caps!

  3. kibitzer3 says:

    This all feels a bit like doodles on a napkin at dinner on the Titanic; but I do want to make a particular comment: to characterize the Congressional Research Service as ‘non-partisan’ is to fly in the face of at least recent history. If the CRS had truly been non-partisan, they would have pointed out the truth to our Congresscritters – or at the least, the argument – about the Constitutional definition of a ‘native born citizen’, in the matter of the necessary qualifications for being a candidate for the office of the presidency.

    According to the Founding Fathers – who put that requirement in the Constitution – BHO was not eligible. According to some smoke that has been blown into the eyes of the public over the years, there is some question about its definition. But there is at least ‘some question’ about it. The CRS let all our representatives off the hook in this matter. And for that, I hope they go down with the Titanic. Or at least end up in a far, far warmer place than they are residing right at the moment, with their cool, tall ones and smoky cigars, for having misled the Congress so. And thereby, the American public.

    A pox, ladies and gentlemen in that very responsible position. A pox.

    • kibitzer3 says:

      Excuse me; I was momentarily distracted by all the misconceptions on this issue floating around. I meant, of course, “natural born” citizen; as opposed to just native born, or naturalized, or any other form. Sorry.

  4. Debbie says:

    jean…there is a story on John Kettlers site that completely backs up Gordon Duff’s story, but the spooks won’t allow me to post the link…I have tried ten times….maybe you can get it and post for your reader…it’s quite amazing..

    ufo-war-in-the-pacific at john’s site.

  5. Bjorn says:

    Just som thoughts around the 2-cent mark………
    Tax cuts don’t spur growth, but complicated tax laws (imposed by both the democrats and the republicans) always favors the rich, and destroys growth.
    Here at ‘my place’ we have this ‘great’ Social Democratic Government. But even they have understood that you cannot tax the companies to death. So what do they do? Well, they create tax laws that favors companies. So the rich declare themselves as a forest of different ‘single-person-entities’ and pay much less tax than the rest.
    And what do you get in addition? And enormous government office overseeing the tax collection. There is no better ways to stop any growth than to create large government offices. Due to the deep rooted human feeling of envy, they have higher tax brackets for higher incomes here (if you receive a salary). But people spends large amounts of time getting around it. So the end result is the same as in the US. The rich pay less and enormous resources are wasted to find ways around tax laws.
    The only solution, in my opinion, is a version of what the GOP candidate Herman Cain once suggested. (That is, if you insist on taxing income). Tax every type of income (and I mean every) with the same percentage. Say 10% for instance. The result would be as fair as you will be able to get it. People would stop wasting their time trying to get around it, Another excellent side effect would be that you could slash a vast number of non-productive people at the tax offices.

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