Wednesday, January 9, 2013
Tax Foundation: CRS Study on Tax Rates and Growth Still Flunks the Test, by Stephen J. Entin:
Studies issued by the Congressional Research Service are intended to inform the Congress as it develops public policy and enacts legislation. A recent CRS publication on the effect of the top statutory tax rates on economic activity [Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945] may have influenced the debate over taxing the rich during the election and may have influenced the tax changes just enacted in the fiscal cliff legislation.
It is critical that such studies reflect the best guidance that the economics and tax professions can provide. The CRS study on the top tax rates did not meet that high standard. Its original release in the fall was met with widespread and justified disbelief, and it was withdrawn for review and examination of its methodology. It has now been reissued in an updated form. However, the re-issued CRS study does not contain any changes of note that would redeem the original report.
The paper purports to determine the link (or lack thereof) between changes in the top marginal tax rates on income and capital gains and the growth rate of the economy. Unfortunately, the method used to determine the relationship depends mainly on timing, looking to see if a change in the growth rate of the economy coincides with or follows soon after a rise or fall in the tax rates. The study makes no effort to determine the channels through which the tax changes ought to work to affect the economy, looks at the wrong measure of progress over the wrong time frame, and takes inadequate account of what other tax or economic events are occurring at the same time that might mask the results. ...
The CRS study omits important variables and poisons its results by not holding other factors constant. The variables it does examine are indirectly related to the relationship one should be studying, but the study does not follow them for long enough to get the whole picture. The study is as weak now as it was when it was first issued. Grade: F.
Prior TaxProf Blog posts:
- CRS: An Economic Analysis of the Top Tax Rates Since 1945 (Sept. 17, 2012)
- Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth (Nov. 2, 2012)
- Republican Staff Study: CRS Report on Tax Rates Is Flawed (Nov. 14, 2012)
- CRS Re-issues Report: Tax Rates on Rich Have 'Negligible' Effect on Economic Growth (Dec. 14, 2012)