Budget Reporting Fails to Acknowledge the Evidence that High Taxes Hurt Economic Growth

March 14, 2013

There’s been lots of coverage of the dueling House and Senate budgets that were released this week and how they represent such contrasting views of the proper size and role of the federal government, particularly in regard to taxes. House Republicans propose to keep total taxes as a share of GDP about where they are projected to be under current law (19 percent of GDP), but lower the top rate to 25 percent and broaden the base by closing “loopholes”. Senate Democrats propose to just broaden the base, raising taxes by $1 trillion or more over 10 years, by closing “loopholes” benefitting the rich and corporations. Neither budget is very specific beyond that, but these are very clear statements of philosophy, with Democrats arguing their budget is more fair, and Republicans arguing their budget is more conducive to economic growth.

But New York Times reporter Eduardo Porter doubts the premise that lower taxes grow the economy:

Problem is, there is little evidence that tax cutting has worked as advertised.

Thomas L. Hungerford, an economist with the Congressional Research Service, got into trouble with Republicans last year when he published a study suggesting that the sharp drop in top tax rates since 1945 did little to lift economic growth but probably did contribute to soaring income inequality.

And there’s no clear evidence that lower tax burdens have helped the United States grow faster than other advanced industrial nations with higher tax rates and much heavier tax burdens. Economic growth per person in the United States was a little faster than in France or Australia over the last 40 years. But it was a little slower than in Austria, Germany and the Netherlands, according to data from the Organization for Economic Cooperation and Development, a research organization for the world’s richest countries.

While high taxes do have an effect on variables that affect growth, many other factors are much more significant and overshadow whatever taxes do.

First, we debunked the CRS study on numerous occasions. There is no peer-reviewed academic journal in the world that would accept such a sloppy analysis.

Second, casual correlations can be dangerously misleading when it comes to the complexity of economic growth. This is why I reviewed all the major studies on the subject from the last 30 years, and 90 percent of them indicate high taxes hurt economic growth, particularly taxes on profit and income.

Third, the studies show taxes on profit and income have bigger effects on the economy than government spending. Yes, these studies find other factors matter as well, such as inflation and demographics, but these factors do not “overshadow whatever taxes do.”

This is a very misleading article because it has the patina of science, quoting Nobel laureates and expert economists:

“It’s hard to say for sure what our economic trajectory would have looked like with higher taxes,” said Alan Auerbach, an expert on the economics of taxation at the University of California, Berkeley. “Some of the disappointment that our low taxes haven’t had a more obvious impact comes from overblown claims of tax cut supporters.”

Yes, of course it is impossible to predict the future with 100 percent certainty. But the preponderance of evidence gives us a clear sense of the most likely effects of taxes. Ignoring and obscuring this evidence is the opposite of science.

Such reporting makes it even less likely there will ever be broad agreement on the federal budget.

Follow William McBride on Twitter @EconoWill

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