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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, November 2, 2012

Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth

CRS LogoNew York Times:  Nonpartisan Tax Report Withdrawn After GOP Protest:

The Congressional Research Service has withdrawn an economic report [Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (R42729) (Sept. 14, 2012), by Thomas L. Hungerford] that found no correlation between top tax rates and economic growth, a central tenet of conservative economic theory, after Senate Republicans raised concerns about the paper’s findings and wording....

The decision, made in late September against the advice of the agency’s economic team leadership, drew almost no notice at the time. ... But it could actually draw new attention to the report, which questions the premise that lowering the top marginal tax rate stimulates economic growth and job creation. ...

Senate Republican aides said they had protested both the tone of the report and its findings. Aides to Mr. McConnell presented a bill of particulars to the research service that included objections to the use of the term "Bush tax cuts” and the report’s reference to “tax cuts for the rich,” which Republicans contended was politically freighted.

They also protested on economic grounds, saying that the author, Thomas L. Hungerford, was looking for a macroeconomic response to tax cuts within the first year of the policy change without sufficiently taking into account the time lag of economic policies. Further, they complained that his analysis had not taken into account other policies affecting growth, such as the Federal Reserve’s decisions on interest rates.

“There were a lot of problems with the report from a real, legitimate economic analysis perspective,” said Antonia Ferrier, a spokeswoman for the Senate Finance Committee’s Republicans. “We relayed them to C.R.S. It was a good discussion. We have a good, constructive relationship with them. Then it was pulled.”

The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical. ... “When their math doesn’t add up, Republicans claim that their vague version of economic growth will somehow magically make up the difference. And when that is refuted, they’re left with nothing more to lean on than charges of bias against nonpartisan experts,” said Representative Sander Levin of Michigan, ranking Democrat on the House Ways and Means Committee....

The report received wide notice from media outlets and liberal and conservative policy analysts when it was released on Sept. 14. It examined the historical fluctuations of the top income tax rates and the rates on capital gains since World War II, and concluded that those fluctuations did not appear to affect the nation’s 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,” the report said. “However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” ...

Mr. Hungerford, a specialist in public finance who earned his economics doctorate from the University of Michigan, has contributed at least $5,000 this election cycle to a combination of Mr. Obama’s campaign, the Democratic National Committee, the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee.

Wall Street Journal editorial:  Congressional Research Hit Job: Democrats Politicize a Supposedly Nonpartisan Think Tank:

The Congressional Research Service is supposed to be a nonpartisan research tool for the House and Senate, but like so many institutions in Washington it is now being hijacked for partisan ends. The dispute concerns a highly politicized CRS tax study that Democrats have been trying to use as a cudgel against Mitt Romney.

The tax study just happened to appear on the CRS website in September in the heat of the Presidential tax debate. Author Thomas Hungerford purported to show that 65 years of changes in "top tax rates have had little association with saving, investment or productivity growth." The timing couldn't have been better for President Obama, and the usual liberal media suspects picked it up. So did New York Senator Chuck Schumer, who used it in a speech to attack tax reform.

Mr. Hungerford tells us the study wasn't requested by a Member of Congress, so perhaps it was his idea. You won't be surprised to learn that Mr. Hungerford has donated to the Obama campaign and Senate Democrats and worked as an economist at the White House budget office under Bill Clinton.

Republicans understandably objected to this partisan exercise, especially because the study has statistical design flaws and ignores multiple peer-reviewed studies that have found a significant relationship between cuts in tax rates and the pace of capital formation, investment and economic growth.

CRS officials then pulled the report from its website. In a Sept. 28 email to a Republican Senate staffer, CRS deputy director Colleen Shogan wrote that "I decided to remove the Hungerford report from the CRS website for now." She added that she had given Mr. Hungerford's manager, Don Marples, "a list of concerns I would want addressed in a future version" and that "in particular, I want a better, more robust defense of the methodology in the paper."

Now Senate Democrats are trying to portray Mr. Hungerford as a victim of censorship due to GOP pressure, and Thursday they got an impressionable Jimmy Olson at the New York Times to buy the spin. The reality is that sometime after we called Mr. Hungerford, he or someone else at CRS talked to Senate Democrats, who decided to give the study one more propaganda run before Election Day. ...

This episode is nonetheless a significant blot on the CRS reputation for unbiased research. We're not sure why Congress needs a research operation when it already has a budget office, a tax committee and thousands of staff, but it surely doesn't need one that acts like an arm of the Democratic Party.

(Hat Tip: Ann Murphy, Mike Talbert.)


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" . . . especially because the study has statistical design flaws and ignores multiple peer-reviewed studies that have found a significant relationship between cuts in tax rates and the pace of capital formation, investment and economic growth."

Which studies are those?

Posted by: HCG | Nov 2, 2012 1:10:00 PM


Start here, for example:

Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.

Searching around in google scholar will reveal several other papers.

Posted by: Ted Thalix | Nov 3, 2012 5:25:03 AM

Thanks. That changes in fiscal policy have macroeconomic effects is an old Keynesian story. But you said "especially because the study has statistical design flaws . . ."

What are these flaws and the evidence that they are flaws?

Posted by: HCG | Nov 3, 2012 8:23:22 AM

Not knowing much about economics, I'll rely on the Nobel Prize winner who blogs for the NY Times:

". . .when the CRS report first came out I didn’t write about it because it was basically old news (which is not to criticize the report, which did a fine job of putting the evidence together). Nobody has ever been able to find clear evidence of a link between high-end tax cuts and growth. The raw fact, after all, is that the US economy did better in the first half of the post World War II era, with high top marginal rates, than it did in the second half: growth was both somewhat slower and much more unequal in the years after Reagan’s 1981 cut than before."

Posted by: Bob | Nov 3, 2012 8:29:11 AM

I am presuming that it was Paul Caron who put up the original post, but others are replying instead, and not really answering my question.

I have read this study, and I expect that Mr. Hungerford would agree with the observation that this study is not the last word on this issue, Nonetheless, it is a valuable study in that it shows that there are no readily discernible impacts of income tax rates on per capita GDP growth. Krugman says as much.

This means that while there may be small discernible effects in a more disaggregated study, given the pressing national needs to reduce deficits and the debt, and to reduce growing disparities in the distribution of income, the negative growth impacts of higher taxes, especially on higher income tax units, are not likely to be serious. This is a useful finding, and of course deserves more examination.

Citing the ideological Tax Foundation and the intellectually dishonest WSJ editorial page is hardly support from the views expressed here, but rather undermines them.

Posted by: HCG | Nov 4, 2012 9:30:52 AM

HCG: I suppose you think the OECD is ideological too. Here they find that progressivity of income taxes is associated with slower growth:

Posted by: Will McBride | Nov 5, 2012 9:31:58 AM

I repeat:

But you said "especially because the study has statistical design flaws . . ."

What are these flaws and the evidence that they are flaws?

Posted by: HCG | Nov 5, 2012 12:05:42 PM