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Study Disproves GOP’s Only Economic Plan

The Congressional Research Service has released a study of tax rates, economic growth and income inequality from 1945 to the present day. Unsurprisingly, the study finds that the only economic plan the Republican party ever has — cutting income taxes for the wealthy — does not spur economic growth, but does shift the tax burden to everyone else (and drops federal revenue, thus creating far more debt). The study’s conclusion:

The top income tax rates have changed considerably since the end of World War II. 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 average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, 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. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

When David Leonhardt confronted Paul Ryan (before he was named VP nominee) with a chart showing these correlations, here’s how he dismissed them:

That was precisely the question I was asking Mr. Ryan when I brought him the chart last year. He wasn’t the vice presidential nominee then, but his budget plan has a lot in common with Mr. Romney’s.

“I wouldn’t say that correlation is causation,” Mr. Ryan replied. “I would say Clinton had the tech-productivity boom, which was enormous. Trade barriers were going down in the Clinton years. He had the peace dividend he was enjoying.”

The economy in the Bush years, by contrast, had to cope with the popping of the technology bubble, 9/11, a couple of wars and the financial meltdown, Mr. Ryan continued. “Some of this is just the timing, not the person,” he said.

He then made an analogy. “Just as the Keynesians say the economy would have been worse without the stimulus” that Mr. Obama signed, Mr. Ryan said, “the flip side is true from our perspective.” Without the Bush tax cuts, that is, the worst economic decade since World War II would have been even worse.

While this is not entirely invalid, it is a false equivalence. First, we have actual evidence that the stimulus bill did spur job growth. Indeed, how could it not? Spending a few hundred billion dollars on projects that require workers cannot possibly not create jobs; those jobs aren’t done by ghosts, for crying out loud. Second, about 1/3 of that bill, over $200 billion, was comprised of tax cuts and breaks, the very thing that Ryan continually claims is the only way to spur the economy; he doesn’t get to have it both ways, arguing that tax cuts boost the economy when Bush does it, but not when Obama does it.

But we have no evidence that tax cuts spur job growth, especially when they’re so small and tax rates are already at historic lows. As Andrew Sullivan points out, “bringing a tax rate of over 70 percent way down to the 30s can make a big difference” but, “Once you’re in the 30s, the ammunition is much much smaller.” And since the ultra rich — the “job creators” — get more than half their income from capital gains, taxed at only 15%, cutting the marginal top rates has little effect.

Derek Thompson sums it up:

Does this story prove that raising taxes helps GDP? No. Does it prove that cutting taxes hurts GDP? No.

But it does suggest that there is a lot more to an economy than taxes, and that slashing taxes is not a guaranteed way to accelerate economic growth.

And here’s where Paul Ryan has a small point, though he refuses to follow it to its logical conclusion. He’s right that other factors have a large effect on economic growth, both for the better and the worse, so a mere correlation between tax rates and growth doesn’t necessarily prove anything. He’s right that in the 1990s, the tech boom was a big reason why the economy boomed and that raising the top tax rate by a few percent did not actually create that growth. There are so many other factors that are far more important when it comes to economic growth — currency values, booms or busts in other countries that help or hurt the export sector, interest rates (though here again, they’re already so low that they are essentially meaningless now as an input to growth), the amount of money in circulation, technological innovations, productivity growth, and a dozen other things.

But what it does show is that raising or lowering the marginal tax rates has little to do with growth in GDP or employment because those other factors dwarf their influence over demand and spending. And that’s exactly why it’s absurd that cutting marginal tax rates is the only economic plan the Republicans have, or have had, for decades now. It’s like the owner of a sports team saying that the key to getting attendance up at their stadium is the brand of mustard they use on their hot dogs — there are a hundred factors far more important than that, all of which they are ignoring.

Comments

  1. matty1 says

    Spending a few hundred billion dollars on projects that require workers cannot possibly not create jobs

    I believe the opponents argument is about net jobs so although not supported by evidence it is possible that.

    Businessman A had a pot of money he was going to spend hiring two people.

    Instead he bought government bonds with that money.

    The government spent the money it had borrowed from Businessman A on hiring but because of other costs only enough was left to hire one person.

    I’m not saying this happened or was particularly likely but it was possible.

  2. says

    Spending a few hundred billion dollars on projects that require workers cannot possibly not create jobs; those jobs aren’t done by ghosts, for crying out loud.

    Just wait a little while. They’ll add “necromancer” onto the big list of things Obama secretly is.

  3. eric says

    We have been doing this experiment at the state level for decades, and there’s no evidence in that data either (that lower tax rates lead to economic growth). Several states have zero income tax and they do not do appreciably better than the states that have income taxes. Just look at Texas vs. California. 0% vs 10% for the highest income brackets. Both are in debt, running deficits, and both have the same debt per capita.

    So, if the Fed somehow decided to give California millionaires their 10% back, then the state might…what? Have such an economic boom that looks like Texas? Who wants to look like Texas? They have higher poverty rates, poorer education, etc., etc.

  4. Reginald Selkirk says

    Mr. Ryan continued. “Some of this is just the timing, not the person,” he said.

    So Ryan understands that concept. And yet he blames Obama for everything that has gone poorly while he was president – and even before!

  5. says

    Without the Bush tax cuts, that is, the worst economic decade since World War II would have been even worse.

    Ryan does know that Dubya presided over the Great Mortgage Bubble, right? If you can’t make an economy boom (even a false boom) on a bubble that size…
    And why do they always start the look back through history after World War II, me asks knowingly? It’s almost as though they want to avoid the previous instance, and the solutions to it (as well as the foolishness of austerity budgets).

  6. lofgren says

    “I wouldn’t say that correlation is causation,” Mr. Ryan replied. “I would say Clinton had the tech-productivity boom, which was enormous. Trade barriers were going down in the Clinton years. He had the peace dividend he was enjoying.”

    Apparently in Ryan world, inverse correlation IS causation.

    Also, it appears that he is basically saying, “Sure, higher taxes do not necessarily impede job growth, but that’s only because the government was taking many other actions to encourage job growth, like investments in technology, infrastructure, trade agreements, and building economic ties with foreign countries instead of bombing the fuck out of them.”

    Like… yeah… that’s what the Democrats are saying, too…

  7. raven says

    A similar study was done worldwide recently.

    They looked at the 15 most well off countries.

    Most of those were also…the 15 highest taxed countries.

    A lot of third world countries have effective tax rates that are close to zero. Among them are Greece, Jamaica, and Argentina. These countries are also chronically troubled and going nowhere.

    I’ve always been fascinated by Argentina. They have huge natural resources, a large land area, temperate climate, well educated population. Argentina should be rich, like it was at one time. Instead, it seems to lurch from crisis to crisis forever.

  8. says

    I’m not saying this happened or was particularly likely but it was possible.

    Yeah, and the opposite is possible too — and maybe a lot more probable: Businessman A wouldh ave spent the money hiring two people to produce something that would have fattened his bank account; but the government could have spend the same amount hiring two people to do something that would have enabled other businessmen to do more business an dhire more people than they otherwise would have.

    Also, money spent by private entities can go anywhere — like maybe to pay Chinese workers to produce consumer goods — while money spent by a government is more likely to stay in-country — we don’t exactly import cops, firefighters, soldiers, sailors, or roadbuilders, remember?

  9. gshelley says

    I wonder if he would be so keen to point out that correlation doesn’t mean causation if the figures supported his view

  10. baal says

    Phase 1: Good Economy
    Phase 2: **
    Phase 3: Your individual life gets better

    ** There needs to be a mechanism here.

    If you measure ‘good econ’ by GDP (or other single measure) you might miss out on the trend that more of the middle class is falling into the lower class. The income disparity in the US is a travesty and a sign of a failed economy. So much as is possible, the media need to get negative feedback on ‘economy reporting’ which reminds them that a ‘good econ’ is not a good in and of itself. The relevant good is whether or not the economy is serving the needs of the population.

  11. lofgren says

    we don’t exactly import cops, firefighters, soldiers, sailors, or roadbuilders, remember?

    Have you met my friend Mexico…?

  12. d cwilson says

    Businessman A had a pot of money he was going to spend hiring two people.

    The problem is, Businessman A doesn’t hire people just because he has a pot of money. He hires people because he needs them. In other words, when demand is up and he needs more people to increase productivity, he hires more people. But, if the market for his product is stagnant, he’s more likely to put that money into his stock porfolio or buy bonds, because that will give him a better return on investment than paying people he doesn’t need.

    The flaw in republican ideology can be spotted by any Freshman who has taken Economics 101. Empoyment is correlated with demand, not tax rates.

  13. says

    Shorter Paul Ryan: The failure of the Bush tax cuts to cause an economic boom doesn’t count because we had a bad economy, and the failure of the Clinton tax increases to ruin the economy doesn’t count because we had a good economy.

    Funny thing is, I’ve found that many a wingnut actually finds this convincing.

  14. says

    He’s right that other factors have a large effect on economic growth, both for the better and the worse, so a mere correlation between tax rates and growth doesn’t necessarily prove anything.

    It’s hilarious that the Republicans talk about those other factors as if they matter to them. In reality, regardless what those factors do, their answer is always more tax breaks for the rich.

  15. M, Supreme Anarch of the Queer Illuminati says

    baal @ 10 —

    The rest of us are supposed to just enjoy the honor of living in the same country as people who are mind-bogglingly wealthy. GDP tells us how virtuous we are for giving up most of the value we produce to people who make money mostly just by owning everything.

  16. typecaster says

    The flaw in republican ideology can be spotted by any Freshman who has taken Economics 101. Employment is correlated with demand, not tax rates.

    This is what I expect the Republicans to do next – deny the validity of economics, just as they’ve denied the validity of evolution, or other sciences inconvenient to their ideology. They love analogies to household budgets, but that’s different. Everyone agrees that microeconomics really happens, but macroecononmics is just liberal elitist nonsense spewed out to justify non-right-wing spending polices.

    Mark my words.

  17. says

    This is what I expect the Republicans to do next – deny the validity of economics, just as they’ve denied the validity of evolution, or other sciences inconvenient to their ideology.

    What do you mean, next? This is exactly what they do right now. They don’t claim to be against economics of course, they just adhere to crank theories that lack mainstream academic support (supply-side, Austrianism), and then confidently claim that economics is on their side. They also change their theories to meet the moment, like claiming that government spending can’t create jobs unless it’s on the military, or that debt is the worst thing ever unless they’re the ones running it up. They even appear to believe in time travel so as to blame Obama for things that happened before he took office and to credit Reagan for things that happened a decade or more later. I could go on.

    The point is that their economic claims are no more intellectually honest than claims made by creationists or climate change deniers. In fact they’re usually the same people.

  18. Chiroptera says

    …those jobs aren’t done by ghosts, for crying out loud.

    Yeah, I’ve never really understood the liberterandian belief that when the government collects tax money, it just buries it in the ground.

    I think these people are stuck in a mental development stage where they believe that if they can’t see something, it disappears.

  19. davem says

    Businessman A had a pot of money he was going to spend hiring two people.

    Instead he bought government bonds with that money.

    Meh. More likely scenario:

    Businessman A had a pot of money he was going to spend on a small Picasso.

    Instead he bought a really nice Renoir.

  20. yoav says

    The economy in the Bush years, by contrast, had to cope with the popping of the technology bubble, 9/11, a couple of wars and the financial meltdown, Mr. Ryan continued.

    You mean the wars Paul Ryan helped start without considering how to pay for them?

  21. typecaster says

    I could go on.

    You really don’t have to, or even go that far. Oddly enough, it turns out that I’m perfectly well aware of all that.

    Here, let’s try that again.

    [THIS IS SNARK INTENDED TO MIRROR THE ANTI-EVOLUTION ARGUMENTS AS PRACTICED BY IDIOT CREATIONISTS, PARTICULARLY THEIR ASININE INSISTENCE THAT SOMETHING CALLED MICRO-EVOLUTION EXISTS AND SOMEHOW INVALIDATES SOMETHING ELSE CALLED MACRO-EVOLUTION]
    This is what I expect the Republicans to do next – deny the validity of economics, just as they’ve denied the validity of evolution, or other sciences inconvenient to their ideology. They love analogies to household budgets, but that’s different. Everyone agrees that microeconomics really happens, but macroecononmics is just liberal elitist nonsense spewed out to justify non-right-wing spending polices. [END SNARK]

    Sorry for the miscommunication. I’ll try to be clearer.

  22. says

    Chiroptera “I think these people are stuck in a mental development stage where they believe that if they can’t see something, it disappears.”
    Peekaboonomics?

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