An Inconvenient Truth Goes to Washington: Bush Tax Cuts and Suppression of a CRS Report

After the U.S. elections, Washington can no longer defer America’s fiscal cliff. However, inconvenient truths can be suppressed, as evidenced by suppression of the CRS report on tax rates and economic growth.

Recently, the New York Times reported that the Congressional Research Service (CRS) has withdrawn an economic report, after Senate Republicans raised concerns about the paper’s findings and wording.

The slim 23-page report discovered no correlation between top tax rates and economic growth. While the conclusion is in line with much of conventional wisdom in economic research, it goes against the central tenet of conservative economics.

Taxing Less, Growing Less

When the report was released on September 14, it was barely noticed, which probably says something about our diminished sensibility to income polarization. More attention followed after Senator Charles E. Schumer (NY-Dem) referred to the study a week and a half after it was withdrawn, in a speech on tax policy at the National Press Club.

The pre-election timing served well the Democratic campaign. In turn, Republicans acknowledged that they protested its tone and findings.

Most Americans may know little or nothing about the CRS, the public policy research arm of the U.S. Congress. Usually, CRS reports are widely regarded as in depth, accurate, objective, timely – and nonpartisan.

Entitled “Taxes and the Economy,” the report by Thomas L. Hungerford focused on the economic analysis of the top tax rates since the postwar era. It is not an uncontroversial subject matter.

After all, some policymakers have argued that raising tax rates, especially on higher income taxpayers, to increase tax revenues is part of the solution for long-term debt reduction.

Long-Term Trends

Historical trends are relatively clear. In the early postwar era, the top marginal tax rate was above 90%. Today it is 35%. Further, the top capital gains tax rate was 25% in the 1950s and 1960s, and 35% in the 1970s. But today it is 15%.

The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.

There is not conclusive evidence to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Hutherford concludes that the reduction in the top tax rates have had little association with saving, investment, or productivity growth.

However, the top tax rate reductions do seem to be associated with the increasing concentration of income at the top of the income distribution.

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.

Against Historical Evidence

As Washington must soon focus onto the “fiscal cliff,” some consider the CRS report inconvenient. After all, the idea that the less 1% of Americans pay taxes, the more the remaining 99% will prosper is not exactly supported by more than 65 years of historical experience.

By 2019, the Bush tax cuts and the wars in Iraq and Afghanistan are likely to account for nearly 50% — nearly $9 trillion — of the $18 trillion in debt that America will owe under current policies.

Today, the U.S. public debt burden is close to $16.2 trillion; $2 trillion more than in August 2011, when Washington lost its triple-A credit rating.

The simplest way to begin to stabilize or reverse the rise in the ratio of debt to GDP would be to allow the 2001 and 2003 tax cuts to expire in the medium term. That, however, would go against the central conservative tenet.

It would also go against Grover Norquist’s “taxpayer protection pledge,” which has been signed by 95% of all Republican Congressmen, to oppose increases in marginal income tax rates for individuals and businesses.

5 Responses to "An Inconvenient Truth Goes to Washington: Bush Tax Cuts and Suppression of a CRS Report"

  1. benleet   November 7, 2012 at 9:49 pm

    The top-earning 10% received no more than 35% for 40 years during the U.S.'s greatest economic growth, and their taxes were at their highest. See U C Berkeley's Emmanuel Saez' report, page 6, at… —

    A graphic of distribution of income since 1940 —

    • Fred   November 14, 2012 at 9:25 pm

      That study was of adjusted gross income not gross income, what's the diff? it's considerable. From 1916 to 1971, investors in certain types of real estates could depreciate the entire purchase price which included the land. Investors in oil wells got sizable depletion allowances. There were a slew of other bennies as well. So much so that despite a marginal tax rate in excess of 70% the government passed a law calling for the Alternative Minimum Tax to prevent people from paying almost nothing in taxes despite those marginal rates. In 1955, there were only 5 people who actually paid the highest marginal rate. And to be quite frank the only reason there were any was the lack of quality financial advice for those people as theyre we're plenty of ways to drop that rate below 14 %. So I for one would be happy to go back to those days where the tax code could truly be arbitraged to recapture your own earned income. What is proposed today will not attack the source of wealth disparity only income disparity. Wanna go after wealth disparity and really raise a lot of money… the buffet tax on buffet's net worth and don't allow a single dollar of wealth go untaxed at capital gains rates once. You see mr. Buffet and others like him have effectively made this about income not capital gains. He wont ever pay much in taxes as he borrows from his capital to pay himself an income thereby creating both a deduction and an income that nearly match. Hence no tax. No matter how high you raise the marginal rate he will never pay the same rate as his secretary who by the way makes nearly 200k using his math.

  2. Kevin Hunter   November 13, 2012 at 9:12 am

    This article is incredibly biased and misleading. One could just as easily assign $X trillion in debt to other programs like extended unemployment benefits, the failed stimulus program, increases in food stamps, increased social security benefits, increased medicare benefits etc etc. Just depends which side of the fence you are on.

    There is not conclusive evidence to establish that there is not a relationship between taxes on the top 1% and spending (economic growth). However it is a 100% certainty that higher taxes on the top 1% lead to lower savings by that group and less money for investment.

    The top 1% pay 37% of the income tax. Pretty progressive. More importantly, in all of this retoric, the fact that the marginal income tax rate will be over 50% in several high tax states is lost on people. Is it fair that hard working professional couples that earn over $400k should pay the same tax rate on their extra dollar as Jay Z, Tom Cruise, or the CEOs of Americas largest companies? Think about it. The goverment is making it virtually impossible for the vast majority of educated, hard working Amerricans to accumulate wealth and achieve economic freedom. That is pathetic.

    • EEB   November 15, 2012 at 3:00 am

      What you right- wingers forget is that the percentage of the total tax take from the income tax has plummeted over the last 30 years. Today, about as much federal revenue comes from FICA taxes as from income taxes, whereas 30 years ago, nearly 2/3 of federal revenue came from income taxes; as for corporate income taxes, they account for only about 8% of federal revenues today. In terms of total federal taxes, the 1% pay far less in taxes than they used to, due to the precipitous rise in the share of FICA taxes in federal revenues. The top 1% pay 37% of INCOME taxes because they receive 24% of the National Income and the income tax code is relatively progressive; those who have the income (DUH!!!) pay the income taxes. So, Kevie Baby, smarten up!

  3. Jaw   November 14, 2012 at 9:12 pm

    Bravo Kevin hunter. It is also why the US rides at a precipice of historic proportions. It is merely a few years away from watching its population inflow go into reverse and that is when the tide will really turn for the economy and the politics of the country. It is no accident that I have two children who are looking for employment in other countries where they believe the country is far more favorable to individual liberty and economic opportunity. Both are quite entrepreneurial. We are looking more and more like the euro sclerotic countries we historically disdained for their high taxes and social spending. I hope we go over the cliff, I don't think it would be as bad as the pundits claim and I for one believe in everyone paying their fair share and that includes those under 50 k.