Another Inconvenient Truth: Economic Growth and Higher Taxes Can Go Hand-in-Hand

Despite the United States sprinting head first towards the fiscal cliff, fiscal prudence is not yet coming to Washington.  Fiscal prudence, to define it for the purposes of this article, is to couple tax increases with spending cuts over the long run.  The approach would ensure that the United States doesn’t fall back into recession anytime soon nor continue running up deficits at an unsustainable pace in the years to come.  President Obama ran a campaign and won the office of the Presidency on such a balanced approach.  Exit polls revealed that ~60% of the American public agrees that taxes on the wealthy should be raised.

Avoiding the fiscal cliff, for many is a no-brainer.  What’s the hold up?

Republicans.  Republicans, or at least a large bloc of them, again complain that raising taxes on the richest Americans is a punitive tax; perhaps their strongest arguments are that the higher taxes punish job creators and would by extension reduce employment.

What is worth highlighting here is that even these arguments do not hold any water.  The nonpartisan Congressional Research Service (CRS) issued a report on December 12, 2012, which looked at the relationship between top tax rates and economic growth over the last several decades.  The report finds:

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%. This analysis finds no conclusive evidence, however, to substantiate a clear relationship between the 65-year reduction in the top statutory tax rates and economic growth.

President Obama is not suggesting that top marginal tax return to anywhere near the 90% level in the 1950’s, nor even suggesting that the top marginal tax rate go to 75%, as just happened in France.  Instead, the top marginal tax would rise from 35% to 39.6%, to where they had been under President Clinton and more in line with historical norms.  And because the CRS study reveals no significant correlation between economic growth and higher tax rates, businesses and job creators should know that growth and prosperity is no less possible.  In fact, if the new revenues are used to pay down the debt or create a better educated workforce, then we all become better off.

With all this said, Republicans remain skeptical.  The CRS report, originally issued in September, drew significant criticism from the right, forcing the report to be updated and re-released in December.  As with global warming, evolution, and Nate Silver’s accurately predicting the Presidential outcome in all fifty states, scientific evidence and thoughtful, nonpartisan analysis can seldom trump hard-core ideologues.  The inconvenient evidence is instead ignored.

Unfortunately, the no-compromise approach is once again wreaking havoc.  With prudent policymaking jettisoned in favor of ideology, America is not only going to take a nosedive right over the cliff, but it’s going to be a bumpy and costly ride just to get there.

To see the CRS study, click the following link: http://www.fas.org/sgp/crs/misc/R42729.pdf

The CRS study is entitled “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (Updated),” by Thomas Hungerford.

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