Via TPM, a new study from the Congressional Research Service (pdf) strongly suggests what most non-Republicans have known to be true for decades. Namely, that the supply-side argument for reducing tax rates is utter horsepuckey, as there is no discernible effect of even greatly reduced tax burdens on economic indicators.
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%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.
You could knock me over with a feather.
There is one highly significant correlation CRS found in its study, however. The massive reductions in top marginal tax rates since 1950 had no discernible effect on GDP or productivity growth, meaning they didn't grow the size of the economic pie. What they did do, however, is greatly alter how the pie is divided...
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.
So there you have it. I suppose supply-siders are going to have to come up with some glorious new market-based argument for why having enormous and rapidly increasing income disparities are signs of a healthy economy. I can't wait to hear it.
We probably won't spend much of a diary talking Voodoo Economics, so let's call this an open thread.