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Study: Tax Cuts for the Rich Don’t Spur Growth

Monday, 17 Sep 2012 | 10:46 AM ET
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Cutting taxes for the wealthy does not generate faster economic growth, but may widen the income gap between the rich and the rest, according to a new report.

A study from the Congressional Research Service — the non-partisan research office for Congress — shows that “there is little evidence over the past 65 years that tax cuts for the highest earners are associated with savings, investment or productivity growth."

In fact, the study found that higher tax rates for the wealthy are statistically associated with higher levels of growth.

The finding is likely to fuel to the already bitter political fight over taxing the rich, with President Obama and the Democrats calling for higher taxes on the wealthy to reduce the deficit and fund spending. Mitt Romney and the GOP advocate lower marginal tax rates for top earners, saying they fuel investment and job creation. (Read more: Who Does QE Help Most?)

The CRS study looked at tax rates and economic growth since 1945. The top tax rate in 1945 was above 90 percent, and fell to 70 percent in the 1960s and to a low of 28 percent in 1986.

The top current rate is 35 percent. The tax rate for capital gains was 25 percent in the 1940s and 1950s, then went up to 35 percent in the 1970s, before coming down to 15 percent today — the lowest rate in more than 65 years.

Lowering these rates for the wealthy, the study found, isn't aligned with significant improvement in any of the areas it examined. Pushing tax rates down had a "negligible effect" on private saving, and while it does note a relationship between investing and capital gains rates, the correlations “are not statistically significant,” the study says.

“Top tax rates,” it concludes, “do not necessarily have a demonstrably significant relationship with investment.”

The study said that lower marginal rates have a “slight positive effect” on productivity while lower capital gains rates have a “slight negative association” with productivity. But, again, neither effect was considered statistically significant.

Tax Cuts for Rich Don't Help Economy: Study
CNBC's Robert Frank reports on a new non-partisan study that finds tax cuts for the rich do not promote overall economic growth.

Do higher taxes on the rich lead to faster economic growth? Not necessarily. The paper says that while growth accelerated with higher taxes on the rich, the relationship is “not strong” and may be “coincidental,” since broader economic factors may be responsible for that growth.

There is one part of the economy, however, that is changed by tax cuts for the rich: inequality. The study says that the biggest change in the distribution of U.S. income has been with the top 0.1 percent of earners — not the one percent. (Read more: Salaries of Top Earners Tumbling)

The share of total income going to the top 0.1 percent hovered around 4 percent during the 1950s, 1960s and 1970s, then rose to 12 percent by the mid-2000s. During this period, the average tax rate paid by the 0.1 percent fell from more than 40 percent to below 25 percent.

The study said that “as top tax rates are reduced, the share of income accruing to the top of the income distribution increases” and that “these relationships are statistically significant.”

In other words, cutting taxes on the rich may not grow the economic pie. But the study found that those cuts can affect “how that economic pie is sliced.”



-By CNBC's Robert Frank
Follow Robert Frank on Twitter:
@robtfrank

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  • A reporter and editor, Robert Frank is a leading authority on the American wealthy for CNBC.