CRS, at odds with Academic Studies, Continues to Claim No Harm in Raising Top Earners Tax Rates

December 14, 2012

This week the Congressional Research Service (CRS) resurrected a previously retracted report that claims no association between top marginal tax rates on high income earners and economic growth. This is the same flawed study as before, with a few more caveats and a couple references to tangential academic studies. See our earlier critiques.

The CRS is supposed to be a nonpartisan source of information and analysis for the U.S. Congress. But instead of simply reviewing the academic literature in this area, CRS chose to play politics and muck around with their own version of statistics, so as to get the ideological result that taxes don’t affect economic growth. For this, they look at the top marginal income tax rate in the U.S. since World War II.

First, there is no basis in the academic literature for the CRS technique of using the top statutory marginal tax rate as a measure of taxes. This is because it entirely depends on who pays that rate. The top rate in the late 1950s was 91 percent, but it only applied to income of $3 million or more, in inflation adjusted terms. As Peter Schiff at the Wall Street Journal points out, the top rate applied to no more than a couple hundred taxpayers (in 1958, 236 of 45.6 million taxpayers paid at a rate of 81 percent or more). Today, the top rates are much more broadly applicable. Raising the top two rates of 33 and 35 percent, as the President proposes, would affect 3.9 million taxpayers, out of about 143 million.

Another of many problems is that the CRS excludes any measure of the other major taxes at the federal level, particularly the corporate income tax. This is the largest tax on investment at any level of government, and in many studies has the largest effect on economic growth.

A proper review of the academic literature shows a strong consensus that broad measures of taxes have a negative effect on economic growth, and that corporate and personal income taxes are most harmful, followed by consumption and property taxes. On Monday, we will release a literature review of studies published in peer-reviewed academic journals going back to 1983. There are at least 26 studies, and only 3 show no effect of taxes on economic growth. Of those that look at personal income taxes, the most recent study is by Karel Mertens and Morten Ravn, which finds a 1 percentage point cut in the average personal income tax rate raises real GDP per capita by 1.4 percent in the first quarter and by up to 1.8 percent after three quarters. Another recent study by Robert Barro and C.J. Redlick finds that a cut in the average marginal tax rate of one percentage point raises next year’s per capita GDP by around 0.5%.

There are no published studies that I know of that focus on the top marginal rates paid by high income earners, but since these still count as income taxes we can safely say they also harm economic growth. However, the OECD has found that progressivity of income taxes, i.e. shifting the tax burden to high income earners, is associated with lower economic growth.

The CRS should explain why they chose to ignore the vast academic literature, and why taxpayers should fund their “nonpartisan research”.

Follow William McBride on Twitter @EconoWill



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