Tax Cuts Don't Lead to Economic Growth, a New 65-Year Study Finds
theatlantic.com
theatlantic.com
To understand the tax implications of economic growth you have to look at the tax payments as a percentage of GDP as well as compliance costs. In the US tax payments have held steady at about 18% of GDP since WWII until recently. People hunt for loopholes no matter what. But when rates are low you don't have to look for loopholes, so you can deploy your capital more efficiently. Thus generating economic growth. This is why tax cuts often stimulate large economic booms. Capital that was sitting in say tax-protected muni bonds will move into the market and be deployed for business expansion and thereby hiring.
There's so much evidence to the contrary of this article, even Obama's own counsel of economic advisories share the view that tax cuts stimulate economic growth. Christina Romer, his former advisor wrote a paper on the subject. What they do is look at country around the world to collect more data points for a better regression analysis.
Also note that when you say "tax cuts", not all tax cuts are made equal. For a tax cut to be effective it needs to change long-term behavior. So credits and such have a near zero or negative effect while rate cuts have a positive effect. The most beneficial being capital gain rate cuts (ie every time they have been cut, revenues from the tax have increased), corporate, and then final income tax rate cuts.
-Really going to down vote me without refuting any of what I said.
According to IRS figures, the top 400 tax payers today pay income taxes below 16%. According to the best available figures, the top theoretical tax rate during the 1950s was over 90%, but the average tax rate paid by the top approximately 400 people was 51.2%. Obviously they used a lot of tax loopholes. Obviously they still wound up paying, in real taxes, a lot more than the very rich to today.
Of course if you refuse to believe that the real figures were reported to the IRS, you can believe any figures that you want. But it is pretty hard to reasonably come to the conclusion that the rich today are paying similar tax rates to the rich 55 years ago.
As for taxes and economic growth, it is a trivial piece of economics to conclude that collecting more in taxes immediately takes money away from the economy. However it is only slightly less trivial to conclude that the amount of damage it does is proportional to how likely that money was to get spent. Given that the poor are likely to spent more than the rich, that means that we should prefer to tax the rich more.
Therefore if you're going to levy taxes (and there is no reasonable way to avoid the need to), it is more efficient for all of us to tax the rich more heavily. Instead of taxing them less, which is what they keep telling us we need to do.
(I, along with many of the people on this site, pay a greater fraction of my income in taxes than Mitt Romney does. But is this really good public policy?)
Big problem... You're comparing two completely different things. The 16% number is based on the fact that most of the wealth earn their income through capital gains which is taxed at a lower rate. So you're comparing income taxes to capital gains taxes. Two completely different items, apple to oranges.
> But it is pretty hard to reasonably come to the conclusion that the rich today are paying similar tax rates to the rich 55 years ago.
You're second point is also wrong. The rich actually pay a higher percentage of the tax burden when rates are cut. Look at the 20's. Taxes were slashed and the percentage of the income taxes paid by the rich doubled. Same today happened with the Bush cuts. The top 10% pay 71% of income taxes, and top 1% around 40%. Here's a chart to show you: http://www.heritage.org/federalbudget/top10-percent-income-e...
How much more exactly should the rich pay?
As for capital gains. You don't want to raise it, unless you're out to punish the rich, since when it's lowered it generates more revenue. When it's increase, it generates less.
The first point is interesting. As someone who doesn't know that much about it, would it be useful to look at income tax + capital gains tax incomes to look at burden for the rich vs everyone else. That would be closer way to judge percentages of income taxed. If that's not a good way to look at it,why?
Rates themselves are very abstract quantities since loopholes and deductions have a huge effect and change greatly with time. A good way to look at it is the percent of total tax payments.
To answer your question if you take a look at the link in the post you replied to, the income tax + capital gain tax burden for the rich would be even higher. Likely with the top 1% around 45%-50% and top 10% around 80%+ of all income and capital gains taxes. As you can see the rich already pay a huge amount.
Even if you were to raise the rates on the rich their numbers are so small that it would only cover a week or so of spending at the current levels.
It's a shameful rhetorical trick that degrades the HN experience.
This is an idealogical framing of the conversation. The opposing idealogical framing is:
How much greater economic inequality can society tolerate?
It is this lack of understanding of economics that makes it easy to manipulate you come election time.
And the more your policies destroy people's lives the more you demand even more centralized control.
Which side was it, do tell, that created faux think tanks in the 70s to espouse a particular economic philosophy? These would be the same think tanks that seem to simultaneously advocate for the "marketplace of ideas" and then shun their members when they show a lack of ideological purity.
As for your heritage foundation link, tax rates rise until you make something like $400k/year, and then start falling. Taxes paid by the merely rich have little to do with taxes paid by the super-rich. The big complaints have to do with the latter. We no longer have a tax bracket for what is in inflation-adjusted dollars income over 5-6 million/year. Might we be worse for that fact?
And finally if dropping the tax rates on the very rich results in them paying more money, that says very strongly that dropping those rates increases income disparity by more than it helps anyone else. You call that "punishing the rich", I call that "proof positive that trickle-down is bunk". It is all a question of perspective.
So basically you are saying that the top 10% should complain about the fact that they get a larger share of the income pie, with the consequence that they also pay a larger share of the tax pie. I would just be happy that I was earning more.
Yeah, but 51.2% of what? The key to the real tax rate is all in what gets counted as income. Back then the IRS didn't count a company car as income, whereas today it is. In 1986 Congress added a whole lot of rules to eliminate methods people were using to shelter income, so if tax rates were raised back to 1960 levels the government would be taking a much bigger bite from everybody's income.
Isn't this "economic growth"?
But to answer the question, all that's doing is displacing economic "growth". Moving it from one hand to the other. Business instead of personal.
When you take %50 more of a poor person's income in taxes, you take money they need to live, and this will hurt the economy, both because they can't spend it, and also because some of them will be forced to make less beneficial choices, merely to survive.
Meanwhile, the effective reality is that inflation is a tax. Since inflation devalues the dollars in circulation, the deficit spending that the "anti-tax cut" crowd tends to want to do is really just another form of tax.
Taxes themselves are better, because they don't rely on obscuring the fact that your being taxed (By changing the underlying value of money) and thus they tend to cause fewer bad decisions on the part of economic actors.
Many people make bad investments (eg: houses) thinking they are getting a positive return, when in real dollars they are not. (Houses don't appreciate, the dollar devalues.)
The effect of inflation on working income depends on whether or not wage inflation is above or below CPI.
I would just add that Japan's experience has some unique aspects that will hopefully make it easier for the U.S to avoid that kind of development (I'm more pessimistic about Europe in that regard).
Particularly, Japan has a shrinking population and the asset price bubble in the late 80s was a lot bigger than the real estate bubble in the U.S up to 2006.
What we need to consider is, from a fiscal stimulous POV, the objective of raising or lowing taxes is to get money moving around the economy at all levels. This can happen with either tax cuts or tax increases. For example tax cuts on home building is a classic way of freeing and encouraging investment in a sector that tends to flow across the wider economy. Whereas giving some kind of tax cut to a person or entity that will just hoard that gain will not help the economy. Also increasing taxes is fine, but then the pending needs to be more useful to the economy than leaving the money in the hands of private citizens. For example if you are taking that amount from where it will be hoarded or invested away from the wider economy it can be a good thing for the economy. So if Obama increases tax on the wealthy people (of which a proportion will hoard) and puts it into infrastructure type projects it should benefit the economy. Whereas if the money gets spent on supporting Afghanistan, that same tax cut would hurt the economy as the proportion of funds that would have been invested in the local economy are removed to another location.
For my limited understanding this data may just be a sign that wealth is being hoarded from the wider economy currently, not that high or low tax rates are better. Unfortunately when it comes to economics there are so many variables in play it is very limiting to take a this side or that side stance.
If growth is held back by lack of demand, cutting taxes of savers and financing it by cutting public services for consumers will be a drag on the economy.
Right now, capacity utilization is low and therefore we don't need investment in new capacity. What we need is demand and we won't get it as long as disposable incomes keep going down as they have been for over a decade.
I'm certainly not saying that's the only explanation, only that we don't know. But the article argues that the cause -- tax increases -- produced the effect -- economic growth. It is equally likely that the relationship is reversed.
This is what prevents economics from being a science, and why widespread science illiteracy makes us all fools.
"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."
Yes, and I also read the title and first few lines, which suggest a different conclusion than the article itself. This is a very common practice in science journalism -- the title and first few sentences lead the reader to one conclusion, and the body of the article is full of perfectly appropriate qualifiers that most readers never see or appreciate.
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.
Seems to match the title pretty well.
Except for an uneducated or insufficiently skeptical reader -- and the title ought to be "Tax Cuts Don't Necessarily Lead to Economic Growth". To say that tax cuts don't lead to economic growth is to make an unsupported, absolute claim and tell a half-truth.
My problem is with the superficial impression created by the first few lines and the graph. Remember that most readers don't read beyond the abstract. This is a fact that, instead of being accommodated by science writers, is exploited.
Not to broaden the topic unduly, but I often see articles that say some cause A is "linked" to some effect B. "Linked" is a tricky word because, strictly speaking, it doesn't mean A and B are really linked in the cause-effect sense, but many people understand it that way.
A recent article said, in effect, "Marijuana use linked to IQ decrease". It's obvious what typical parents will make of that. But the actual study didn't "link" the two in the way the title and introduction did.
Assertion: "high" (greater than 50%?) marginal tax rates make economic growth impossible.
Evidence: Top tax rates between 1940 and 1980 were between 70 and 90%. Growth was higher than it was after 1980.
Conclusion: the assertion about the harmful effects of a high top/marginal tax rate is false. (I think this process is called "induction").
Note that this does not prove that high tax rates are beneficial, only that they are not harmful.
It's certainly possible that the general slowdown since 1980 is due to other factors, such as growing scarcity of cheap energy and other materials. But investigating alternatives will screw with the livelihood of somebody in the top 0.01% income earners, so one might argue it's harmful to your health to push too hard for such :-)
Also, one could argue that a property tax would be better than an income tax as a way to enforce maintenance of the commons and to provide infrastructure and an educated work-force. (I tend to favor use of taxes as "investment", rather than "money for nothing")
True evidence-based proofs, the way its done with science, requires that you test one variable. In the example above you'd have to have a parallel economy where all else was the same except the tax rate. Unfortunately this is impossible, but this does not mean we get to change what "proof" means. Economics would work much better if everyone came to terms with the fact that it is untestable and was honest with themselves that all opinions regarding it are just beliefs, regardless which side you fall on.
I don't see that in the title, in the summary, nor in the body of the article. How did you get to this conclusion?
The reality is, anyone who knows anything about economics knows that taxes inhibit economic growth.
The idea that this is wrong, is so absurd that it should be laughed at.... only the problem is, most americans are absolutely ignorant of economics and thus can be tricked into believing it. Or in your case, assuming that "the vast majority of economists" think this, and have done so "for decades".
Frankly, it is astounding how much you have rejected economic as a science while thinking the partisan ideology you're pitching is "economics".
Societies are complex systems and managing them efficiently is actually (gasp) quite difficult.
This is _precisely_ the core tenet of conservative fiscal policy. The idea of coordinating any economy of non-trivial size from a central position is a fool's errand and invariably puts drag on the economy.
Sources:
http://www.usgovernmentspending.com/us_20th_century_chart.ht... http://www.politifact.com/virginia/statements/2011/apr/22/ma...
Cato's reply is here: http://www.cato-at-liberty.org/tax-rates-impact-economic-per...
Because of this it's extra important to be non-partisan, which is hard. Try it though, it's a fun exercise!
My comments: I strongly agree with one of the conclusions of the article, that we should be "humble about taxes as a tool for growing the economy." However, I'm suspicious about their reasoning. I'm not a statistician, but doesn't a sample size of one seem a little . . . low to anyone else? It seems fairly likely to me that if you examined more situations, you would find that taxes are generally not a tool for growing the economy, are sometimes beneficial, and are sometimes strongly detrimental.
For instance, say you're running a city-state in East Asia. Given that you're competing against Hong Kong and Singapore, I'd guess that low taxes would be essential to economic growth. On the other hand, say you find yourself in charge of Somalia now, or Poland in 1938. I don't know about you, but personally I'd really be digging the infrastructure/tanks respectively.
This makes me pessimistic that accurate conclusions can be drawn from a study like this. For instance, say you're rich in 1960s America but you don't like the high taxes. Where else would you go? Now there are lots more options.
Oh wait. Russia tried that. For more than 65 years. It did not work too well for them.
How do you expect to create a fabulously wealthy startup if you are the child of an "untouchable" caste with 0 initial resources???
You might want to learn a little bit of history before spouting off the conventional wisdom you learned in 8th grade.
Russia for hundreds of years was a total backwater. At the turn of the 20th century it was incredibly far behind the rest of Europe. Under communism Russia became an industrialized superpower that rivaled the US. Ultimately the communist system collapsed, but partially because of its own success. The impoverished denizens of pre-Communist Russia had never been able to force democratic reform, but with the economic growth under communism arose a commercial class that was able to force some level of democratic reform.
Let me laugh at your "superpower" claim regarding Russia. For dozens of year that "superpower" had to rely on importing wheat from the US to keep feeding its own population. Being able to launch rockets while your people are literally starving (and I am not talking about being "hungry" as we see often nowadays) is not an achievement, it is an utter failure.
There was no economic growth under communist Russia: it was simply spoliation of people's property to feed certain sectors of the industry (the ones that were "successful". Like Bastiat said, there are "things that you see and things that you do not see". Focusing only on the achievements of Russia makes it easy to forget the massive failure of its system in all other endeavours.
At that time, the USSR was pretty advanced technologically. And it's citizens we're and still are pretty advanced academically.
One explanation why the soviet system failed was due to inefficiency in investing in oil production(which led to a mini soviet peak oil), because the wrong incentives at the institutional level.
But wrong incentives at the institutional levels are pretty common in capitalistic countries: the 2008 crisis is one example.
Like other things in economics, there is an elasticity to the impact of reducing taxes. Going from 80% to 50% makes a big difference. Going from 35% to 39%? I'm not sure it packs the same punch.
The gigantic topic of the upcoming US elections is how taxes should change, if at all. A few generic options that being presented: a) Don't change. b) Increase on those making $250k+ c) Lower taxes on everyone, while removing loop holes in aims to increase the overall base of tax payers.
The argument against option b is that it'll kill investment and economic recovery. That's what this article is disputing. It's not saying that option a, b or c is good or bad. It's saying that the argument against option b that is most often used isn't true when you look at the 65 year economic history of America.
It's based on intuition. That's why it's a bet, not a concrete claim.
Fill in the blank.
Do people want "economic growth" or whatever that might be assumed to lead to, or do they just not want to donate money to their country through their government?
One is kind of indirect and speculative, the other is direct and immediate.
A better headline might be "tax rates and growth only poorly correlated in one particular country in a limited period with the highest rate of technological change in recorded history".
Our economic growth hasn't been paid for yet.
Edit: spelling
No one actually thinks this. It's called pandering to the base.