Wednesday, November 14, 2012

Increase Tax Rates or Eliminate Deductions?

The show down between the Republican House and Obama is going to be whether we raise revenue by getting rid of some deductions or raise tax rates.  My question is:  what is the source of the fear of increased tax rates?

In September of this year, the Congressional Research Service published a paper, "Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 September."   I'm surprised that the paper has not received more attention.  By taking an historical view, it concludes that raising tax rates on the wealthy do not have a negative impact on the economy in any way, but merely increase disparities in income distribution.

Here is the summary:

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 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.

Just looking at the most recent years we see that tax cuts do not equal growth in GDP:

If anyting cuts in tax rates appear to have a negative impact on the economy.

Here are two more charts.  One shows how tax rates for highest income taxpayer have declined over the years, and thje other one shows how the share of total income by the wealthiest has increased over the same time.  One thing is clear:  decreasing tax rates for the wealthy may not help the economy but it helps rich people.

Again, why are Republicans opposing tax increases on the wealthy?

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