“At the level of taxes we’ve been at the last couple decades and the magnitude of the changes we’ve had, it’s hard to make the argument that tax rates have a big effect on economic growth,”
~Donald Marron, Director – Tax Policy Center
It is important that we understand a few basic facts. Cutting taxes for the rich in today’s already low tax environment does not lead to economic growth; they are not saddled with a huge tax burden (see Mitt Romney’s tax returns from 2010 as an example). Let’s also be clear that cutting taxes do not pay for themselves. Conservatives love to espouse this idea that if we somehow just cut taxes for the wealthy … that the government will earn more through tax receipts like MAGIC. Of course – that’s all bullshit.
Conservatives are trying to reduce taxes as low as possible for the wealthiest Americans regardless of the amount of cuts to important safety net programs like Medicare and Social Security that must be made in order to pay for those tax cuts for the rich.
Sometimes you can raise taxes too high and it can hold back the economy but unlike Romney who won’t present a detailed plan – I’ve constructed a model of what I think our tax code should look like HERE. My plan isn’t perfect but it balances the budget day 1 and it cuts taxes for the middle class while raising them on the rich with extreme prejudice. 38.6% effective tax rates for someone making 62 million a year is not unreasonable when you consider what the tax rate was in the 50′s and 60′s; compare that to Mitt Romney’s 13.7% tax rate in 2010. And if the rich try to avoid their taxes – they should receive jail time and the IRS should liquidate their holdings. If they don’t like it – they can move to Costa Rica or Somalia and look over their shoulder in fear constantly. Best of luck.
You can find the study by the Congressional Research Service — a nonpartisan government group that provides analysis to Congress HERE; an excerpt:
The results of the analysis 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 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.
However, the top tax rate reductions appear to be associated 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. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.
The Atlantic points to tax cuts and increases in the past 20 years HERE:
In 1990, President George H. W. Bush raised taxes, and GDP growth increased over the next five years. In 1993, President Bill Clinton raised the top marginal tax rate, and GDP growth increased over the next five years. In 2001 and 2003, President Bush cut taxes, and we faced a disappointing expansion followed by a Great Recession.
Does this story prove that raising taxes helps GDP? No. Does it prove that cutting taxes hurts GDP? No.
But it does suggest that there is a lot more to an economy than taxes, and that slashing taxes is not a guaranteed way to accelerate economic growth.
David Leonhardt at the NY Times explains why HERE:
But tax cuts have other effects that receive less attention — and that can slow economic growth. Somebody who cares about hitting a specific income target, like $1 million, might work less hard after receiving a tax cut. And all else equal, tax cuts increase the deficit, as Mr. Bush’s did, which creates other economic problems.
When the top marginal rate was 70 percent or higher, as it was from 1940 to 1980, tax cuts really could make a big difference, notes Donald Marron, director of the highly regarded Tax Policy Center and another former Bush administration official. When the top rate is 35 percent, as it is today, a tax cut packs much less economic punch.
David Kay Johnston points us to a study written by Owen Zidar – a former economist for President Obama but he was also a former Bain Capital employee HERE:
Owen M. Zidar, a graduate economics student at the University of California at Berkeley, and a former staff economist on the White House Council of Economic Advisers for President Obama, has taken another crack at it, sifting through the data, using the National Bureau of Economic Research’s tax simulation model. Zidar looked at state level income and economic data.
He reasoned that “if tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners.” The data show that tax cuts at the top, though, do not result in faster growth in states with more high-earners.
“Almost all of the stimulative effect of tax cuts,” Zidar found, “results from tax cuts for the bottom 90 percent. A one percent of GDP tax cut for the bottom 90 percent results in 2.7 percentage points of GDP growth over a two-year period. The corresponding estimate for the top 10 percent is 0.13 percentage points and is insignificant statistically.”
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