The New York Times has reported that the nonpartisan Congressional Research Service (CRS) has withdrawn a September report (though it can be found on the Senate Democratic Policy Committee site) that examined the relationship between top tax rates and economic outcomes. CRS made the decision in response to objections raised by Senate Minority Leader Mitch McConnell (R-Ky.) and other GOP senators about the reports “tone and … its findings.”
We’ll leave arguments about tone aside for a moment and focus on the research quality of the report and whether or not the GOP objections have any basis. Spoiler alert: they don’t. The report mostly just confirms what a rich economic literature already has shown: Raising marginal tax rates on the highest incomes just doesn’t have much impact at all on aggregate economic indicators, though it does have considerable impact on inequality.
This is shown in the report through a wide range of descriptive data and scatter plots that show very little obvious relationship between top tax rates and aggregate economic indicators, but which show striking relationships between falling top tax rates in recent decades and the share of overall income accruing to the top 1 percent of households. It then tests to see if these simple two-way relationships hold in a multivariate regression. They do.
So what are the allegedly substantive objections raised by GOP senators to this report? The Times reports:
“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.”
The second criticism—that the report does not control for policies other than tax rates that could affect growth—is just flat incorrect. Table A-1 from the report is reproduced below, showing the other controls the report uses (and even the specific control noted in the Times piece—the effect of Federal Reserve decisions on interest rates—would be accounted for through the inclusion of the AAA bond rate).
The first criticism—that the report does not allow for effects that happen with long lags—has some merit, as explicit regressions with the longer lags are not displayed. However, in a later story, the report’s author notes that he examined lags of three and five years, and the results did not change. One imagines he’d be happy to append these results to the study if it would allow it to be re-released.
Overall, the findings of the report indicate that high-income tax cuts don’t lead to better aggregate economic performance, but they do change the distribution of gains from growth, and exacerbate income inequality. It’s important to note that these results largely just confirm what state-of-the-art public finance research has found. For example, in a review of literature on the responsiveness of reported income to top tax rates, Saez, Slemrod, and Giertz (2012) find relatively little responsiveness in productive economic activity to changes in the top tax rate, while finding a large response in the form of tax shifting and avoidance.
Similarly, Piketty, Saez, and Stantcheva (2011) find a strong correlation between the income share of the top 1 percent and changes in the top tax rate, both in U.S. time series data and in cross-country comparisons. And Tyson and Zidar (2012) have shown that top tax rate reductions have had no statistically significant correlation with job creation, as recently summarized on the Times’ Economix blog.
In short, the CRS report is just another in a long line of credible research showing that cutting tax rates on high incomes does not spur growth but does spur rising inequality.
As for McConnell’s authority to pronounce on public finance research, it should be noted that he recently claimed that, “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.” This statement has the dual honor of being empirically false (as asserted by Bush’s own economic advisors, among everybody else, including conservative public finance experts) while also using the phrase “Bush tax cuts,” which, remember, was on the bill of complaints leveled against the CRS report by … McConnell’s office.
It doesn’t take a leap of the imagination to see how these results threaten the GOP’s decades-long policy agenda of lowering top marginal tax rates, especially with inequality finally landing on the political radar.
So, while neither Hungerford’s results nor the GOP’s efforts to squash them are particularly surprising (though still depressing), what is surprising and damaging is the decision of CRS to buckle to this pressure. This bodes poorly for CRS, economic research (to which CRS makes great contributions), and informed policymaking in the future.