Why Raising Taxes On the Rich Doesn't Hurt the Economy

Lowering top tax rates has not proven to increase economic growth. Here are the facts and figures.

The biggest impact of the fiscal cliff tax deal reached by Congress in early January was an increase in income tax rates for the wealthy. Married taxpayers earning more than $450,000 and singles earning $400,000 will have to pay an additional 4.6% in income taxes--they will pay a total income tax of 39.6% on their income above these levels instead the old 35%.

Most people who oppose tax hikes for the rich claim they will harm the economy because they will reduce investment and job creation. This sounds plausible--the more the government takes in taxes the less will be left for private investment. But is it really true? The answer appears to be "no."

The highly respected Congressional Research Service--a nonpartisan research unit of the Library of Congress--conducted a study of the effect on the economy of reducing top income tax rates since 1945. It concluded in its published report that "there is no clear relationship between marginal high-end tax cuts and economic growth."

The CRS pointed out that throughout the late 1940s and 1950s, the top marginal income tax rate was typically above 90%. The top rate had been reduced to 35% by 2012. Moreover, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; in 2012 it was 15%.

So the top tax rates went down substantially over the last 65 years. If the tax hike opponents are right, this should have resulted in lower growth decades ago than today. But that's not what happened. 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 tax rates went down, economic growth went down.

The CRS concluded that the reduction in the top tax rates has had little association with saving, investment, or productivity growth. If lowering tax rates didn't grow the economy, what did it do? It must have had some impact. It did: It helped increase income inequality, raising the concentration of income at the top. The share of income accruing to the top .1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% during to the 2007-2009 recession.

There you have it, increasing the top tax rates doesn't help grow the economy, but it does help make the rich richer. You can read the CRS report at The New York Times website.

January 2013

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