New Year, New Report by CRS Claiming Taxes Have no Effect on Economic Growth

January 7, 2014

The Congressional Research Service (CRS) has reissued their report claiming taxes have no effect on economic growth, which is a point of view shared by about 8 percent of economists. Think about it. To make such a claim is tantamount to claiming prices or wages do not matter, i.e. workers don’t care about their after-tax pay, investors don’t care about after-tax rates of return, and businesses don’t care about after-tax profits. Here is an excerpt (firewalled at Tax Analysts since CRS does not publish their reports):

Historical data on labor participation rates and average hours worked compared to tax rates indicate little relationship with either top marginal rates or average marginal rates on labor income. Relationships between tax rates and savings appear positively correlated (that is, lower savings are consistent with lower, not higher, tax rates), although this relationship may not be causal. Similarly, during historical periods, slower growth periods have generally been associated with lower, not higher, tax rates.

A review of statistical evidence suggests that both labor supply and savings and investment are relatively insensitive to tax rates. Small effects arise in part because of offsetting income and substitution effects (which make the direction of effects uncertain) and in part because each of these individual responses appears small. Institutional constraints may also have an effect. Offsetting income and substitution effects also affect savings. Capital gains taxes are often singled out as determinants of growth, but their effects on the cost of capital are quite small. International capital flows also appear to have a small effect. Most expenditures that affect the productivity of labor and capital inputs (research and development, education, or infrastructure) are already tax favored or provided by the government. Small business taxes are also sometimes emphasized as important to growth, but the evidence suggests a modest and uncertain effect on entrepreneurship.

We criticized the old versions of this report many times for serious methodological flaws. Basically, it is a simplistic analysis that eyeballs tax rates and growth rates without controlling for any of the other factors that affect growth. Then it fails to reference the many studies which have done this more rigorously, 90 percent of which conclude taxes have a large negative effect on economic growth, particularly taxes on personal and corporate income.

CRS has retracted this study before only to wait out the storm and reissue it at a later date. They show no adherence to science, but instead appear to be driven by an extreme pro-tax agenda. That's fine for an outside advocacy group, but not for one funded by taxpayers and tasked with providing unbiased analysis to Congress.

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