Do Tax Cuts Lead to Economic Growth?

The economic growth that actually followed [tax cuts]— indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism.—

Daily, it seems, I hear Republicans advocate tax cuts as the answer to significantly improving the economy. It’s the basis for saying let’s reduce taxes in order to reduce the deficit, because the economy will get so much better tax revenues will be more than made up.

Check out this New York Times 15 September 2012 article: “Do Tax Cut Lead to Economic Growth?“, especially the graph. To know if a theory, like tax cuts, is meaningful we have to see if its predictions are working. As my post about Keynesian Paul Krugman indicates, his predictions have been pretty close to right (that unemployment would remain high), while these tax cuts are showing little correlation with improved economic conditions. Nor does the Congressional Research Service conclude tax cuts improve the economy, only that it seems to make the wealthy wealthier.

Trickle Down Takes Down Middle Class

Why isn’t this report from the Congressional Research Service entitled Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 making bigger headlines? The Congressional Research Service, known as “Congress’s think tank”, is a branch of the Library of Congress. Since their bosses are a mix of conservative to liberal members of congress it is non partisan, so its reports should carry great weight,

This report’s conclusion (highlighting added by me):

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%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, 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% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.

Let me further distill this: tax breaks for wealthy have no discernible affect on the economy, however they do redistribute wealth making the wealthy even more wealthy.

Since at least Reagan Republicans have strongly advocated for this type of tax policy and thus they have advanced a wealth redistribution to the wealthy. Voter’s need to ask if this is the policy direction they wish to continue.

Update: check out this post by the NYT: Do Tax Cuts Lead to Economic Growth?