For the second time in as many weeks, an analysis by a nonpartisan agency of Congress has demolished the GOP myth of upper-income taxes and so-called "job creators." Just days before voters headed to the polls, the Congressional Research Service documented that for decades tax cuts for the wealthiest Americans were not correlated to economic expansion, but instead to growing income inequality. Now as Republicans on Capitol Hill warn of the supposed "fiscal cliff" they helped manufacture, the Congressional Budget Office is reporting that ending the Bush tax cuts for the rich will have virtually no impact on the U.S. economy at all.
In its report ("Economic Effects of Policies Contributing to Fiscal Tightening in 2013"), the CBO warned that the deficit-slashing effects of allowing the Bush tax cuts to expire, ending the two-year payroll tax holiday and letting last year's budget sequestration deal proceed on January 1, 2013 could return the United States to recession. The combination of spending cuts and tax increases could reduce gross domestic product by 2.9 percent and drive the unemployment rate from 7.9 percent today to 9.1 percent by the end of next year.
But as Dylan Matthews explained in the Washington Post, letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that instant austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1 percent from economic growth next year.
(Continue reading below the fold.)
(It's worth noting that tax cuts for middle and lower income Americans offer a much greater "bang for the buck," a point the CBO and other economists stressed during debates over the 2009 stimulus program.)
If this week's word from the CBO sounds familiar, it should. After all, it was only two weeks ago that the New York Times reported, "The Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economy theory, after Senate Republicans raised concerns about the paper's findings and wording."
As documented in "15 Things the GOP Doesn't Want You to Know about Taxes and the Debt," virtually every article of conservative faith on tax cuts is demonstrably false. In contrast, what the yanked CRS report had to say on the history of tax cuts, productivity, investment, economic growth and job creation was indisputably true:
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 GDP 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%.As Think Progress revealed, the data are clear: Lower taxes for America's so called job-creators don't mean either faster economic growth or more jobs for Americans.
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. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.
For their parts, Senate Minority Leader Mitch McConnell (R-KY) and House Speaker John Boehner (R-OH) are clinging to their party's tall tales on upper-class tax rates. While McConnell warned Democrats are "seeking is the Europeanization of the U.S. economy," Boehner cited a thoroughly debunked Ernst & Young reportin sounding the alarm that:
"Going over part of the fiscal cliff and raising taxes on job creators is no solution at all."But two weeks of nonpartisan studies—and decades of American economic history—confirm that Republican orthodoxy is simply and willfully wrong. As GOP strategist and Weekly Standard editor Bill Kristol acknowledged Sunday:
"It won't kill the country if we raise taxes a little bit on millionaires," he said on "Fox News Sunday." "It really won't, I don't think. I don't really understand why Republicans don't take Obama's offer."And Bill Kristol should know. In 1993, he helped get every single Republican in the House and the Senate to vote against President Clinton's proposed higher upper-income tax rates (ones to which President Obama wants to return). What ensued despite the complete GOP opposition was the longest economic expansion in modern American history and 23 million new jobs.