Wednesday, January 2, 2013
Thomas L. Hungerford
Specialist in Public Finance
Income tax rates are at the center of many recent policy debates over taxes. Some policymakers argue that raising tax rates, especially on higher income taxpayers, to increase tax revenues is part of the solution for long-term debt reduction. For example, in the 112th Congress the Senate passed the Middle Class Tax Cut (S. 3412), which would allow the 2001 and 2003 Bush-era tax cuts to expire for taxpayers with income over $250,000 ($200,000 for single taxpayers). Other policymakers argue that maintaining low tax rates is necessary to foster economic growth. For example, the House passed the Job Protection and Recession Prevention Act of 2012 (H.R. 8), which would extend the 2001 and 2003 Bush-era tax cuts for one year. The Senate also considered legislation, the Paying a Fair Share Act of 2012 (S. 2230), that would implement the so-called “Buffett rule” by raising the tax rate on high-income taxpayers.
Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the size of the economic pie). Skeptics of this view argue that higher tax revenues are necessary for debt reduction, that tax rates on highincome taxpayers are too low (i.e., they violate the “Buffett rule”), and that higher tax rates on high-income taxpayers would moderate increasing income inequality (change how the economic pie is distributed across families). This report attempts to explore whether or not there is any evidence of an association between the tax rates of the highest income taxpayers and economic growth. The analysis in this report does not provide a comprehensive model to examine all the determinants of economic growth. Data are analyzed to illustrate the association between the tax rates of the highest income taxpayers and measures of economic growth. For an overview of the broader issues of these relationships see CRS Report R42111, Tax Rates and Economic Growth, by Jane G. Gravelle and Donald J. Marples.
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. Analysis of such data conducted for this report suggests the reduction in the top tax rates has had little association with saving, investment, or productivity growth. It is reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth. For instance, the tax revenue projected from allowing the top tax rates to rise to their pre- 2001 levels is $49 billion for 2013 or 0.3% of projected 2013 gross domestic product.
The top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. 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% during to the 2007-2009 recession. During a portion of that time period, however, the share of the tax burden borne by top taxpayers increased. For instance, the top 0.1% of taxpayers paid 9.4% of all income taxes in 1996 and 11.8% in 2006, but their share of income paid in taxes decreased from 33% in 1996 to 25% in 2006.
Date of Report: December 12, 2012
Number of Pages: 25
Order Number: R42729
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