The Congressional Research Service (CRS) set out to make a convincing case that lower income tax rates do not strengthen the economy. It failed, but in so doing, it called into question the quality of CRS analysis and the institution’s credibility as non-partisan.
The CRS is supposed to provide expert, objective, non-partisan research analysis to Congress. Most of the time, the CRS performs this function admirably and diligently; the longstanding episodic exception has been in tax policy. The most recent example of this partisan divergence is a report setting out to do the impossible: use historical data to argue that lower rates do not encourage stronger economic growth and, by implication, that higher marginal tax rates such as those espoused by President Obama do not discourage economic growth.
The CRS report presents a slew of periods between 1945 and 2010 comparing the top marginal income tax rates and capital gains rates with economic growth rates. From these correlations the author concludes that lower rates do not correlate with stronger economic growth.
In fact, these stylistic correlations prove nothing. In short, the economy is more complicated than this simplistic approach can acknowledge. For the analysis to prove anything, it needed to account for countless other economic and policy factors, many specific to a given period, and determine how those factors influenced economic growth in the period in question. With this as background, the analysis would then have to isolate the effect lower rates had on growth.
CRS, and many others that argue against lower tax rates, mislead when they make such flimsy correlations because they fail to disclose that no two time periods are the same. Comparing 1950 to 2010 just on tax rates is ludicrous. The world and tax policy are entirely different in those timeframes. If CRS tried to account for all the differences, and then determine how tax rates influenced growth, it would find a different and more accurate answer: that lower rates encourage growth.
There is little doubt about this. One need only look at how liberals approach tax policy when it comes to behaviors they don’t like. For instance, when it comes to energy consumption, carbon production, cigarette smoking, and countless other liberal bugaboos, their answer is always the same: Raise taxes on the behavior to cause people to cut back on it. Liberals can’t seem to apply the straightforward converse of this logic to economic growth, for some reason.
Of course, if you tax income, investment, and savings less you’ll get more of them and the stronger growth that comes with the increase in these activities. And if you raise tax rates on those most able to react, then the reactions will be that much more pronounced. Upper-income taxpayers have the most capacity to adjust their behavior; by shifting the composition of their labor income to avoid tax, to shift the composition of their investments to avoid tax, or to shift away from work effort toward leisure.
It is vital that the public, the media, and, most importantly, policymakers don’t fall for misleading analysis, even when it comes from an otherwise credible source. The economy is in bad shape and will remain that way unless and until it gets better policy from Washington. One of those policy improvements would be lower tax rates through tax reform.