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The true impact of tax cuts at the top

Some interesting new research [PDF] has been published by the US Congressional Research Service on the impact of changes to the top rate of tax and economic growth.

The top marginal tax rate in the US has fallen from above 90 per cent in the ’40s and ’50s to 35 per cent today; capital gains tax has fallen to 15 per cent, as the graph below shows:

Top marginal tax rate and top capital gains tax rate, 1945–2010

Top marginal tax rate and top capital gains tax rate, 1945–2010

Has this spurred economic growth? It appears not. The study’s key conclusions are that:

‘[C]hanges 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 [Inland Revenue Service] data, the share of income accruing to the top 0.1% of US 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.’

For the econometrically minded among you, here are the crucial graphs. The broadly flat lines in the first graph indicate that cutting top rates of tax is not associated with higher growth; the steeply downward sloping lines in the second graph show that cuts to top tax rates are associated with increased income inequality.

Real per capita GDP growth rate and top tax rates, 1945–2010

Real per capita GDP growth rate and top tax rates, 1945–2010

Share of total income of top 0.1% and top tax rates, 1945–2010

Share of total income of top 0.1% and top tax rates, 1945–2010

All grist to the mill for the debates on the chancellor’s forthcoming autumn statement.

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