Tax the Rich, Kill the Economy? Here's Proof It Doesn't Work That Way

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Tax the rich

Republican presidential candidate Mitt Romney wants to extend the Bush tax cuts, and cut taxes even further in order to boost economic growth. In contrast, President Barack Obama argues that in order for the government to to pay its bills, we must allow the Bush tax cuts to expire (at least on the wealthy) and add surtaxes on high-income taxpayers in order.

But would cutting taxes on "job creators," as Gov. Romney proposes, rather than raising taxes on "the rich," as the President proposes, actually boost economic growth? No -- at least not according to the Congressional Research Service.

A Storm in the Making...?

Last week, in a headline that seemed about to spark a firestorm on the Internet (until Governor Mitt Romney's "47%" video preempted the pundits' attention), the CRS took up the question of whether "reduced [tax rates on the wealthy] would increase economic growth, increase saving and investment, and boost productivity."

Their conclusion: It wouldn't.

To the contrary, after 20 pages of charts, graphs, and economic navel-gazing, the CRS came to a startling (to some) conclusion: A review of 65 years of tax and economic data running from 1945 (when top capital gains and top marginal income tax rates topped 90%) through 2010 (by which time the top income tax bracket had declined to 35%, and the capital gains rate had fallen to 15%) shows no "conclusive evidence ... to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth." (Here -- see for yourself).

capital Gains tax

Rather, the "data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth." These reductions did, however, result in "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% due to the 2007-2009 recession."

To summarize: Lowering taxes on the wealthy makes the rich richer, and doesn't do anything to boost economic growth.

... Or Just a Tempest in a Teapot?

The reaction from the political right wing was just as you'd expect, with the conservative think tank The Heritage Foundation firing off a quick rebuttal: "The Congressional Research Service ... set out to make a convincing case that lower income tax rates do not strengthen the economy. It failed, but in so doing, it called into question the quality of CRS analysis and the institution's credibility as non-partisan."

Heritage proceeded to work itself up into a fine lather, declaring that no matter what the data show, it is "impossible ... to argue that lower [tax] rates do not encourage stronger economic growth." The attempt to do so is "simplistic," "flimsy," and "misleading."

Impossible why? Apparently, just because the Heritage Foundation says so: "Of course, if you tax income, investment, and savings less you'll get more of them and the stronger growth that comes with the increase in these activities."

(Oh, well. If it's "of course," then I guess there's no point in looking at evidence ....)

Can't We All Just Get Along?

Now to be fair, Heritage's argument sounds sensible -- even in the absence of evidence to back it up. Taxing anything makes it more expensive, and as we all know from Economics 101, when the price of something goes up, demand for it goes down. (It's right there in the line graph.) Logically speaking, therefore, the Heritage Foundation's argument should be right, and the CRS's data should have shown this to be the case.

Except it didn't.

Instead, the CRS research showed that lowering the rate of the top income tax bracket was "not associated with private saving" and "not necessarily associated with productivity growth." As far as growing the economy goes, the "fitted values seem to suggest that higher tax rates are associated with slightly higher real per capita GDP growth rates."

So... so much for that theory. Apparently, now we're stuck with only two options. Option 1: Dismiss the facts as "impossible." Option 2: Follow a new theory that better fits the facts.



Motley Fool contributor Rich Smith gets a bit nervous when politicians start talking about raising taxes on the rich. His only request: "Please don't forget the definite article."

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hogwild252

Of course hurting the rich will hurt America and jobs. The rich know how to keep what they have,whether thats moving thier companies to other countries to avoid those higher taxes and other countries will give these companies tax breaks there just because they did move thier companies and created jobs so don't think the rich are stupid and they didn't get what they have because they are idiots.

October 16 2012 at 9:45 PM Report abuse rate up rate down Reply
COMMON SENSE

You cannot help the poor by destroying the rich.
You cannot strengthen the weak by weakening the strong.
You cannot bring about prosperity by discouraging thrift.
You cannot lift the wage earner up by pulling the wage payer down.
You cannot further the brotherhood of man by inciting class hatred.
You cannot build character and courage by taking away people's initiative and independence.
You cannot help people permanently by doing for them, what they could and should do for themselves.

........Abraham Lincoln

September 29 2012 at 5:42 PM Report abuse rate up rate down Reply
1 reply to COMMON SENSE's comment
walker

Dude, way to be intellectually dishonest. Those words weren't Lincoln's. They were the words of William J. H. Boetcker. http://en.wikipedia.org/wiki/William_J._H._Boetcker It's called research. Conservatives should try it. Now here's a genuine Lincoln quote: "Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." How's that for socialism from the last good Republican?

November 04 2012 at 2:14 AM Report abuse rate up rate down Reply
COMMON SENSE

You cannot help the poor by destroying the rich.
You cannot strengthen the weak by weakening the strong.
You cannot bring about prosperity by discouraging thrift.
You cannot lift the wage earner up by pulling the wage payer down.
You cannot further the brotherhood of man by inciting class hatred.
You cannot build character and courage by taking away people's initiative and independence.
You cannot help people permanently by doing for them, what they could and should do for themselves.

........Abraham Lincoln

September 29 2012 at 5:42 PM Report abuse rate up rate down Reply
aol english

Taxing the wealthy at 100% of all their income and the value of their property would only keep the economy going debt free for one month! Reckless spending devalues the dollar, causes inflation, which causes the US Debt payment to our creditors to rise, which causes investors to lose faith in the dollar and causes the dollar to crash, because it will no longer be used as the world reserve currency. Lets see how you like our economy one year from now when this crap starts. Where will all the bail-outs and entitlement spending come from then? I still can\'t believe that this article came from a finacial website. How incompetent.

September 27 2012 at 9:50 PM Report abuse rate up rate down Reply
spiritus2b

When will people ever learn. When you help the wealthy "You help the wealthy" if a repub can't lie they get physically ill. A survey was don't by New England sociologists found when they asked one thousand "auto sales people" there political view's were 86 % were repubs. That's why Ann Coulter was just rushed to the mental hospital with a strange illness called "Repub Magical Truth Syndrome"

September 27 2012 at 11:04 AM Report abuse rate up rate down Reply
spiritus2b

When will people ever learn. When you help the wealthy "You help the wealthy" if a repub can't lie they get physically ill. A survey was don't by New England sociologists found when they asked one thousand "auto sales people" there political view's were 86 % were repubs. That's why Ann coulter was just rushed to the mental hospital with a strange illness called "Repub Magical Truth Syndrome"

September 27 2012 at 11:02 AM Report abuse rate up rate down Reply
spiritus2b

When will people ever learn. When you help the wealthy "You help the wealthy" if a repub can't lie they get physically ill. A survey was don't by New England sociologists found when they asked one thousand "auto sales people" there political view's were 86 % were repubs. That's why Ann coulter was just rushed to the mental hospital with a strange illness called "Repub Magical Truth Syndrome"

September 27 2012 at 11:02 AM Report abuse rate up rate down Reply
Scott

GOP Control of Congress 1911 to 1934 = Great Depression started in the end of 1929
GOP Control of Congress 1981 to 1987 = 1987 WS Crash
GOP Control of Congress1995 to 2007 = Great Recession of 2007

September 27 2012 at 12:07 AM Report abuse -1 rate up rate down Reply
rosarite

Why they do not ask Bill Clinton when he tried to tax the rich with the luxury tax? He was thinking in a way to tax the rich by add tax to item over 100K. The rich are the only ones that can afford to buy expensive jewelry etc etc. Three months later he had to repeal it because the rich stopped buying expensive items. The boat and the jewelry industry in Florida almost when on bankruptcy. The same will happened if they try to tax the rich.

September 26 2012 at 11:23 PM Report abuse -1 rate up rate down Reply
rosarite

Why they do not ask Bill Clinton when he tried to tax the rich with the luxury tax? He was thinking in a way to tax the rich by add tax to item over 100K. The rich are the only ones that can afford to buy expensive jewelry etc etc. Three months later he had to repeal it because the rich stopped buying expensive items. The boat and the jewelry industry in Florida almost when on bankruptcy. The same will happened if they try to tax the rich.

September 26 2012 at 11:22 PM Report abuse -1 rate up rate down Reply