PLANK NOVEMBER 1, 2012
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The New York Times reports that on September 28 the Library of Congress's nonpartisan Congressional Research Service withdrew, under pressure from Senate Minority Leader Mitch McConnell, R.-Ky., and other Senate Republicans, a widely-circulated study concluding that since 1945 tax cuts have had no measurable impact on economic growth. I have cited the study repeatedly since its September 14 release, and so have many other journalists and academics within what Karl Rove once scornfully called the “reality-based community.” The withdrawal won’t have any impact on the report’s availability, except perhaps that more people will read it now. That's because CRS reports are never released to the public anyway. (Its Web site is useless unless you're looking for a job there.) They’re released to members of Congress. Then the interesting ones trickle out onto nongovernmental Web sites or those of individual senators or representatives. McConnell can tell the New York Times all he wants to take down its copy of the report, but he probably won't bother, because it’s public information and it has no conceivable relevance to national security.
The withdrawal is, nonetheless, outrageous. McConnell spokesman Don Stewart told the Times that the CRS report wasn’t just criticized by Republican senators; it was also criticized by what the Times (in a paraphrase) calls “people outside of Congress.” I wish the Times had taken the opportunity to say who these “people outside of Congress” are. You can probably guess. There’s the conservative Heritage Foundation. And there’s the Tax Foundation, a conservative nonprofit (not to be confused with the Tax Policy Center, which is non-ideological and nonpartisan but has nonetheless been vilified by the right for pointing out that Mitt Romney’s proposed tax cut benefited the rich at the expense of the middle class). The author of the CRS study, Thomas Hungerford, has written many excellent studies on themes directly or indirectly related to income distribution, and that’s made him a conservative target for some time. This past April, Kevin Hassett of the conservative American Enterprise Institute (a prominent income-inequality denialist and Romney adviser doomed never to live down his co-authorship, shortly before the dot-com bust, of a book titled Dow 36,000) testified before Congress’s Joint Economic Committee that a different Hungerford report was “radically at odds with the literature. I relish academic debate, and think that authors serve a valuable service when they challenge research. But a CRS report that is supposed to inform about the consensus of the literature that veers so far from that activity is a disservice to Congress, and the taxpayers.” When Hassett cites “the literature” he means “the literature acceptable to AEI hacks and their Republican allies in Congress,” or what Jacob Weisberg has felicitously labelled “the Conintern.”
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What’s the matter with the CRS report? Well, it calls the Bush tax cuts “the Bush tax cuts,” which is somehow deemed partisan but in fact is merely explanatory. The Bush tax cuts were tax cuts passed when George W. Bush was president. Bush proposed them, pushed them through Congress, and signed them into law. Even Republicans call the Bush tax cuts “the Bush tax cuts.” The CRS report also stands accused of making reference to “tax cuts for the rich.” This is unacceptably hurtful, I suppose, to a group that a more sensitive person would know to call the “differently-incomed.” As it happens, though, my PDF search of the CRS report reveals that nowhere does the phrase “tax cuts for the rich” appear. The word “rich” does appear here and there, but always in a neutral context, such as, “Under both definitions of the top of the income distribution (i.e., the rich) the income shares were relatively stable until the late 1970s and then started to rise.”
The Times cites two substantive objections Republicans made to the CRS report. One objection (voiced by Heritage's Curtis Dubay within days of the report's release) is that the report doesn’t take into account “other economic and policy factors, many specific to a given period, and determine how those factors influenced economic growth in the period in question.” Precisely what these factors might be Dubay doesn't say (the Times mentions Fed policy), which suggests Dubay is poised to dispute any accounting of taxation's impact on the economy that he finds ideologically uncongenial. The other objection (voiced last week by the Tax Foundation's Stephen Entin) is that CRS looked only at the year following the tax cut, when in fact it can take up to 10 years for the impact of a tax cut to be felt. This argument inadvertently makes tax cuts appear an extremely ineffective policy tool. If you have to wait 10 years to enjoy the benefit, then conservatives are always wrong when they prescribe tax cuts specifically to address current economic circumstances (as they pretty much always do). Both arguments make the perfect the enemy of the good and have the practical effect of making the question of whether tax cuts promote economic growth conveniently unanswerable.
Please note that Hungerford’s study didn’t say there is no relationship between tax cuts and economic growth. It said there is no discernible relationship. He is hardly the first academic researcher to make this observation. The conservative economist Martin Feldstein went fishing for such a relationship in a 1989 paper about economic growth under Ronald Reagan. Feldstein’s paper, coauthored by Douglas Elmendorf, current director of the Congressional Budget Office, reached pretty much the same conclusion (though Feldstein and Elmendorf did suggest that tax cuts could effect the “composition” of economic growth). “We really don’t have any evidence that [personal income tax rates have] any effect on growth,” Berkeley economist Alan Auerbach told Business Week in September. “A lot of the research showing otherwise is based on theoretical calculations.” There isn't even any discernible evidence that capital gains rates affect economic growth. Hungerford made that observation in a 2010 CRS report, but others have said so, too.
If you can’t find any evidence that tax cuts foster economic growth, then any belief that they do must be based purely on faith. The CRS report’s true offense is to question the religion that favors tax cuts to cure any and all problems. For any congressional agency to venture an opinion about such doctrine violates the Constitutional separation between church and state.
Correction. An earlier version of this post made erroneous reference to Sen. Mitch McConnell as the Senate "majority leader."
15 comments
The CRS sat on the roof all night, reported that they never saw Santa Claus, so the Republicans shoved them off the roof.
- Fishpeddler
November 1, 2012 at 5:04pm
Everyone knows that research has a liberal bias. I mean, all research, because it requires structure, reading and analysis. So of course if you are conservative, you would vote against research. Of any kind.
- icarus-r
November 1, 2012 at 5:13pm
When the facts fly in the face of what you believe, ask that those facts be withdrawn.
- Nusholtz
November 1, 2012 at 5:30pm
Noah-nothing, the effects of taxes on markets are well known and documented at length in every econ 101 text in publication. It is usually called dead-weight loss. You might want to use wikipedia for your information. the labor market is indeed a market, and the effects of taxes on labor do exist and are detrimental. This is accepted by all economists of all political stripes. Taxes and tariffs closely related. Even the Krugman text I studied in grad school has this concept. (Krugman was a serviceable international trade economist before his lobotomy and liberal quackery began) ** Also, most of the studies focus on GDP growth rather than the far superior statistic of PPP disposable income. Increasing Gov component of GDP not useful or sustainable.
- mr_rationale
November 1, 2012 at 5:45pm
Noah agrees that "tax cuts have had no measurable impact on economic growth". Voters conclude Noah will not cut their taxes, and may well increase them since tax increases have no measurable impact on economic growth. Noah loses the election, and doesn't understand why since every reputable economist agrees with him that tax cuts have no measurable impact on economic growth.
- rayward
November 1, 2012 at 7:26pm
Government SPENDING, however, does have an impact on GDP growth. So, if you spend, but don't collect the taxes to pay for it, the economy will improve -- until you have to stop spending because you're out of money, or you have to sell T-Bills to people to get the money. People conveniently ignore the 90% top tax rates under Eisenhower -- and the economy did not grind to a halt. They forget the high tax-rates for upper incomes during WW-II, which was paying for putting all those people to work on the Government dime. People also conveniently ignore that the Laffer Curve Reagan tried to use failed pretty quickly, leading Reagan to roll back some of those tax cuts he instituted.
- AllanL5
November 1, 2012 at 8:04pm
Hey, rationale. You must actually read those textbooks. The deadweight losses are from taxes on consumption of some resource, whether for production purposes, such as labor, or direct consumption. The action is through price effects, putting a wedge between the price paid by buyers and the price received by sellers. The study discussed here is about income taxes and the effects of tax rates on growth. The supply and demand relationships that result in the conclusion of a deadweight loss don't apply. No one knows the price effects of income taxes, but there is good reason to doubt that there are any.
- roidubouloi
November 1, 2012 at 9:00pm
Econ 101, rationale, Econ 101. Not enough to have taken the course. You have to understand the material.
- roidubouloi
November 1, 2012 at 9:01pm
Contra rationale, there is copious evidence that in an advanced industrial economy, private demand is not sufficient to sustain output. If the government sector does not take up the slack, the economy underperforms. (Among other things, rat is confused about the differences between micro and macro economics, applying notions appropriate to micro to a macro problem to which they have no application.) There is also sound reason to believe that a skewed income distribution adversely affects growth. The supply-side claim that increased rate of return through tax cuts on capital income is both without empirical support -- the evidence no one can find -- and without good theoretical support. Investment is ultimately for the purpose of providing consumption goods and services. It has no other purpose. Thus, the size of the capital is a function of the quantity of consumption. The rich can only consume so much. If income is skewed to the top, it starves the economy of demand. Consumption purchases lag output capacity and then, necessarily, investment lags as it must be in proportion to consumption. As well, the incentive to increasing capital stock is capital-labor substitution, reducing labor costs by substituting capital. If labor rates are not under upward pressure due to unemployment, it eliminates the incentive to increase the capital stock. Indeed, excess labor supply can lead to de-capitalization as it becomes more cost-effective to substitute labor for capital. Accordingly, growth is achieved by keeping consumption demand, and hence labor demand high through both government spending and relatively equal income distribution. The more unequal the distribution, the more the government must spend (and vice versa). This is the simplest explanation for the fact that GDP growth was at its highest rate, ever, during the period 1940 to 1980 when income distribution was also historically the most equal. The decline in growth starting in 1980 is exactly coincident with the rise in inequality. At an extreme, you get too much money in the hands of the investment class and thus too much money chasing too few investment opportunities. Asset values get bid up and inevitably there is a bubble that bursts. Anyone seen a burst in an asset bubble after 30 years of growth in income inequality? Look hard. There are likely multiple reasons for the growth in inequality, but, whatever the reasons, it is well within our power to restore income equity using the tax system. We could, for example, exempt the first $100,000 of income from taxation and tax income above that at 50%. We would have no deficit and a much more equal distribution of after-tax income. Then, instead of funding the pension and medical systems with payroll taxes, we could substitute carbon taxes and have an economic fiesta. We would have the incentive for energy conservation and innovation, a reduction in labor costs, and an increase in demand and labor costs fueling an increase in investment sufficient to solve the demographic problem of the retiring baby boomers. All of this is directly contrary to right-wing libertarian supply-side nutjob pseudo-economics as championed here by mr. rat and seattle and a couple of others. Needless to say, when the evidence contradicts their flat-earth theories -- as it must because their theories are complete hogwash -- they suppress the evidence -- in the spirit of academic debate of course.
- roidubouloi
November 1, 2012 at 9:15pm
Gee. Suppression of facts by the GOP. This is amazing. Not. It seems they've also lost the book on women. We have this fool in Illinois, Rep. Joe Walsh, who says women don't die in childbirth or suffer damage to our health either. Various right wing superpacs are throwing millions at his opponent, Tammy Duckworth, a war hero. Go figure.
- Sophia
November 1, 2012 at 10:23pm
Top rate tax cuts do nothing for consumption. It increases investment overseas in low cost labor markets or payments to other investors and causes little to go to the checkbooks of business. Lower capital gains rates tilt investment away from small business into the stock market. Job growth: Reagan's first term with Cap Gain preference - 6.5 million Reagan's 2nd term eliminated Cap Gain Preference - 10.3 million Clinton's first term without cap gain preference - 12 million Clinton's 2nd term after reinstating cap gain preference - 8.1 million Bush's 1st term increasing cap gain preference and adding in dividends - 2.7 million Bush's 2nd term - minus 4.5 million.
- Nusholtz
November 1, 2012 at 10:52pm
Republicans don't do research. They believe and then they pray.
- magboy47.
November 2, 2012 at 1:43am
So how do we keep the GOPer political hacks' religious paws off the People's rightful property?
- smabry03
November 2, 2012 at 6:46am
All taxes impose dead weight loss; and this loss of social welfare can be estimated. This fact should not be in dispute. However, Hungerford's study stated that economsits, as a group -- with some exceptions -- do not find discernible evidence that minor changes in marginal tax rates, ceteris paribus, affect the rate of economic growth, which is usually measured by annual percentage changes in real Gross Domestic Product. The study did not state that changes in income tax rates, unequivocally, do not, effect economic growth. In any event, the Congressional Research Service should not have taken this study out of circulation. The only possible reason that I can see, is that this controversy will result in greater circulation of this study and other CRS studies.
- ejdubin
November 2, 2012 at 2:07pm
ejdubin"All taxes impose dead weight loss" Why is it, then, that Clinton raised top rates and the economy did better? Growth from top rate tax cuts and the cap gains preference were not supported by evidence in the study. Top rate cuts are not the same as lower tax cuts, which most likely will increase consumption. Top rate tax cuts can end up in lower cost foreign labor markets or in the hands of other investors, while economic spending, by and large, is spent in ways that benefit business directly. The cap gains preference tilts investment away from small businesses, where profits are taxed at higher rates. (see job growth numbers posted above.)
- Nusholtz
November 2, 2012 at 6:59pm