Congressional report finds higher tax rates don't hurt growth, so Republican party has it pulled

"Changes in the top marginal tax rate do not appear correlated with growth."

A new report from the US's Congressional Research Service has been suppressed by Republicans after it concluded that tax rates are uncorrelated with economic growth or saving, investment, and productivity growth – but do affect the extent of income inequality in the nation.

The report concludes:

The top income tax rates have changed considerably since the end of World War II. 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 average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

The report is particularly important for its treatment of capital gains tax as well as just income tax. The former is significantly lower than the latter, and has been for all but three years of the US's post-WWII history. As a result, it is a significant avenue for tax avoidance.

The argument for keeping capital gains tax low is that it stimulates investment, by encouraging people to invest rather than spend income. If, as the report concludes, it is in fact unconnected with investment rates, then that method of tax-dodging could be closed without harming the economy much, if at all.

The report, which was written by a neutral government body, was not welcomed by the Republican party, which is opposed to much taxation. The New York Times' Jonathan Weisman writes:

Senate Republican aides said they had protested both the tone of the report and its findings. Aides to Mr. McConnell presented a bill of particulars to the research service that included objections to the use of the term “Bush tax cuts” and the report’s reference to “tax cuts for the rich,” which Republicans contended was politically freighted.

They also protested on economic grounds, saying that the author, Thomas L. Hungerford, was looking for a macroeconomic response to tax cuts within the first year of the policy change without sufficiently taking into account the time lag of economic policies. Further, they complained that his analysis had not taken into account other policies affecting growth, such as the Federal Reserve’s decisions on interest rates.

“There were a lot of problems with the report from a real, legitimate economic analysis perspective,” said Antonia Ferrier, a spokeswoman for the Senate Finance Committee’s Republicans. “We relayed them to C.R.S. It was a good discussion. We have a good, constructive relationship with them. Then it was pulled.”

The Republican congressional leadership. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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How to end the Gulf stand off? The West should tell Qatar to reform its foreign policy

Former defence secretary Geoff Hoon on the unfolding crisis in the Gulf. 

Only one group stands to benefit from a continuation of the crisis in Gulf: The Quartet, as they are now being called. Last week, The United Arab Emirates foreign minister tweeted that Qatar and its Gulf Cooperation Council neighbours are heading for a "long estrangement". We should take him at his word.

The European political establishment has been quick to dismiss the boycott by Saudi Arabia, the UAE, Bahrain and Egypt as naïve, and a strategic mistake. The received wisdom now is that they have acted impulsively, and that any payoff will be inescapably pyrrhic. I’m not so sure.

Another view: Qatar is determined to stand up to its Gulf neighbours

Jean-Yves Le Drian, France's foreign minister, was in the region over the weekend to see if he could relay some of his boss’s diplomatic momentum. He has offered to help mediate with Kuwait, clearly in the belief that this is the perfect opportunity to elevate France back to the top table. But if President Emmanuel Macron thinks this one will be as straightforward as a Donald Trump handshake, he should know that European charm doesn’t function as well in the 45 degree desert heat (even if some people call him the Sun King).

Western mediation has so far proceeded on the assumption that both sides privately know they will suffer if this conflict drags on. The US secretary of state Rex Tillerson judged that a Qatari commitment to further counter-terrorism measures might provide sufficient justification for a noble reversal. But he perhaps underestimates the seriousness of the challenge being made to Qatar. This is not some poorly-judged attempt to steal a quick diplomatic win over an inferior neighbour.

Qatar’s foreign policy is of direct and existential concern to the other governments in the Gulf. They will not let Qatar off the hook. And even more than that, why should they? Qatar has enormous diplomatic and commercial clout for its size, but that would evaporate in an instant if companies and governments were forced to choose between Doha and the Quartet, whose combined GDP is almost ten times that of their former ally. Iran, Turkey and Russia might stay on side. But Qatar would lose the US and Europe, where most of its soft power has been developed. Qatar’s success has been dependent on its ability to play both sides. If it loses that privilege, as it would in the event of an interminable cold war in the Gulf, then the curtains could come down.

Which is why, if they wanted to badly enough, Le Drian and Tillerson could end this conflict tomorrow. Qatar’s foreign policy has been concerning for the past decade. It has backed virtually every losing side in the Arab world, and caused a significant amount of destruction in the process. In Syria, Libya, Egypt and Yemen, Qatar has turned a blind eye to the funding of Islamic revolutionaries with the financial muscle to topple incumbent regimes. Its motives are clear; influence over the emergent republics, as it had in Egypt for a year under Mohamed Morsi. But as we review the success of this policy from the perspective of 2017, it seems clear that all that has been achieved is a combination of civil unrest and civil war. The experiment has failed.

Moreover, the Coalition is not going to lift sanctions until Doha suspends its support for the Muslim Brotherhood. When Western leaders survey the Gulf and consider who they should support, they observe two things: firstly, that the foreign policy of the Quartet is much more aligned with their own (it doesn’t seem likely to me that any European or American company would prefer to see a revolution in Dubai instead of a continuation of the present arrangement), and secondly, that Qatar would fold immediately if they applied any significant pressure. The Al Thani ruling family has bet its fortune and power on trans-Atlantic support; it is simply not credible that they would turn to the West’s enemies in the event that an ultimatum was issued. Doha might even welcome an excuse to pause its costly and ineffective programmes. Even if that involves some short term embarrassment. It is hardly going to lose support at home, with the highest GDP per capita in the world.

It would be necessary to make sure that the Coalition understands that it will have to pay a price for decisive Western intervention. The world will be a more dangerous place if our allies get the impression they can freely bully any smaller rival, knowing that the West will always come down on their side. That is however no great hurdle to action; it might even be a positive thing if we can at the same time negotiate greater contributions to counter-terrorism or refugee funding.

Unfortunately the reason why none of this is likely to happen is partly that the West has lost a lot of confidence in its ability to resolve issues in the Middle East since 2003, and partly because it fears for its interests in Doha and the handsome Qatari contributions in Western capitals. This cautious assessment is wrong and will be more harmful to Qatar and the aforementioned interests. The Quartet has no incentive to relent, it can’t afford to and will profit from commercial uncertainty in Doha the longer this drags on. If the West really wants this to end now, it must tell Qatar to reform its foreign policy or face sanctions from a more threatening ally.

Geoffrey Hoon was the UK defence secretary from 1999 to 2005.  

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