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Fiscal Cliff: Congressional Research Study Had This All Figured Out Weeks Ago

• January 02, 2013 • 9:40 AM

imagesAmid holiday clamor over the politics of the so-called “fiscal cliff,” Thomas L. Hungerford must be off somewhere shaking his head. Hungerford, whose byline identifies him as a specialist in public finance, authored a Congressional Research Service report on taxes that came out in mid-December, just a few weeks before the “cliff” kerfuffle started. Taxes and the Economy: an Analysis of the Top Tax Rates Since 1945 (Updated) is, perhaps, not a title that makes one want to dive right in. But the obscurity of Hungerford’s text is telling, insofar as his conclusions don’t seem likely to land the report on John Boehner’s nightstand.

Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%.

The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.

This analysis finds no conclusive evidence, however, to substantiate a clear relationship between the 65-year reduction in the top statutory tax rates and economic growth. Analysis of such data conducted for this report suggests the reduction in the top tax rates has had little association with saving, investment, or productivity growth.

It is reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth. For instance, the tax revenue projected from allowing the top tax rates to rise to their pre-2001 levels is $49 billion for 2013 or 0.3% of projected 2013 gross domestic product.

The top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. 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% during to the 2007-2009 recession. During a portion of that time period, however, the share of the tax burden borne by top taxpayers increased. For instance, the top 0.1% of taxpayers paid 9.4% of all income taxes in 1996 and 11.8%.

Adjusting for the CRS’ respectable concern for non-partisan language, that’s pretty close to a government economist saying eat the rich. Amid a debate over whether $250,000 or $400,000 a year counts as such, it’s notable that the legislature’s own findings aren’t being thrown around Washington as lustily as the trash talk has been this week.

 

Marc Herman

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