Wednesday, November 14, 2012
Joint Economic Committee Republican Staff Analysis, Historical Tax Rates: Rhetoric vs. Reality (Nov. 14, 2012):
A recent report by the Congressional Research Service claims that changing the top statutory individual income tax rate has little or no effect on economic growth. To support this claim, the CRS report compares the top rates from 1945 through 2010 with various economic indicators, such as private saving, investment, productivity, and per capita GDP; and it finds no statistically significant relationship. This result should not be surprising. The top rate is only one feature of our tax system. By itself, the top rate tells us nothing about the overall tax burden.
When it comes to economic growth, what matters most are the effective marginal tax rates on labor and capital. Effective rates reflect the interaction between statutory rates, credits, and deductions for individuals and businesses, as well as the distribution of income. Marginal rates measure the additional taxes paid on additional income earned. Thus, the effective marginal tax rate determines the after-tax return to labor and capital, which affects the incentive to work, save, and invest. The top rate affects the economy only to the extent that it affects the effective marginal tax rate.
Many pundits and policy advocates claim history proves we can tax the rich with economic impunity. They base their claim on an historical comparison between the top statutory individual income tax rate and various economic indicators. Yet this comparison is based on an incomplete and misleading measure of the overall tax burden. Before Congress decides it can raise the top rate without any adverse effects, policy makers need to get the relevant facts about how taxes affect the economy.