The Republican Joint Economic Committee Does Public Finance

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November 14, 2012

The Republican Joint Economic Committee Does Public Finance

Or, "Just because you can?t prove that the top marginal tax rate has a large impact on economic growth doesn?t mean that it doesn't: just have faith!"

As readers will recall, recently a Congressional Research Service report on the impact of top marginal tax rates was ?disappeared? after pressure by the Republican leadership was exerted. [1] The report (mostly a survey of the literature) found no statistically significant impact of top rates on growth. Yet the Republican JEC (to differentiate it from the JEC under Robert Casey)would have us start from the null hypothesis of there being an effect, and only rejecting that (null) hypothesis when sufficient evidence was found against there being an effect.

Now, the JEC-Republicans have produced a report (well, more like a blogpost) that asserts that CRS should?ve studied the effective rate. Indeed, it may very well have been the case that CRS should?ve undertaken that study. After all, I think most of us think the effective rate is important. Oh, they actually did! (Gravelle, Marples, "Tax Rates and Economic Growth," Report R42111 (December 2011)).

Conclusion: I think the JEC-Republicans should critique the CRS report that addresses the topic the JEC-Republicans argue the CRS should?ve analyzed (and actually did), rather than the CRS report that addresses exactly what it says it address in its title. (After all, I assume that the JEC-Republicans have access to all the CRS reports.)

But I thank the JEC-Republican staff for the best laugh I have had today.

More on the ?disappearance? of the CRS report, by Bruce Bartlett.

Posted by Menzie Chinn at November 14, 2012 11:55 AM

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We'll have a chance to put it to the test when the $120,000 tax increases go through the Top 1%.

Posted by: Steven Kopits at November 14, 2012 01:05 PM

Still flogging that tendentious report, eh Menzie?

Posted by: Rich Berger at November 14, 2012 01:10 PM

Rich Berger: I would love for you to specifically identify which econometric or factual error is in the report, given the title of the report. Now, you can say that's not the report that should have been written -- that's your prerogative. But it's not a critique per se.

Posted by: Menzie Chinn at November 14, 2012 01:14 PM

Progressives are not going shut up until they extract their revenge on some fraction of the wealthy, so maybe this is a compromise.
Carney also left the door open to the idea of raising the threshold for extending the Bush-era tax cuts to $500,000 or $1 million. Obama drew the line at $250,000 in his proposal.
http://www.huffingtonpost.com/2012/11/13/obama-bush-tax-cuts_n_2124324.html?ir=Politics

Here is a much more sane approach that isn't motivated by revenge or jealousy.
According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years. Moreover, according to the TPC's distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.

http://gregmankiw.blogspot.com/2012/11/how-to-raise-tax-revenue-from-rich.html

However, entitlement reform must be part of the bargain. Otherwise, the rate of spending growth continues unabated and the lunacy of the progressive "solution" of rasing taxes to offset revenue shortfalls each time the economy slows will become obvious.

Posted by: tj at November 14, 2012 02:11 PM

I've decided retirement isn't for me since interest income is next to nothing.

Sorry about that, college grads.....

Posted by: Chickenpookie at November 14, 2012 02:39 PM

tj How many nano-seconds would it be before the fat cats and their lobbyists were pushing through new deductions? We've been down this road before. In theory the 1986 tax reform was a thing a beauty; an economist's dream. It only took a few short years before it morphed into a disaster that necessitated two huge rate increases in less than four years. Why do you think a 2012 version would end any different?

I'm not sure just what you mean by "unabated" spending. Try looking at the NIPA tables. Federal government spending on consumption and investment has been declining the last couple of years. Nondefense spending is just about where it was during the Reagan years. The "unabated" spending has been on the defense side of federal consumption and investment spending. If you want to look at spending that's driving the outyear deficits than look no further then healthcare. Remember that the next time you and CoRev parrot the Tea Party whine about Obamacare cutting $716B from Medicare.

Posted by: 2slugbaits at November 14, 2012 03:09 PM

The President is calling for $1.6 trn in tax hikes over the next decade, or $160 bn per year. Assuming this affect people with incomes over $250,000, that's 3.9% of the country's 118 million households, or 4.6 million households.

Here's the math:

$250k income cut
-- avg. $280k income in cohort (my estimate)
-- Bottom 2.9% of Top 3.9% of HH
-- 3,422,000 households in total
-- Average incr. tax burden: $23,000 per year
-- Share of gross income: 8.2%

$350k income cut
-- avg. $450k income in cohort (my estimate)
-- Bottom 0.9% of Top 1.0% of HH
-- 1,062,000 households in cohort
-- Average incr. tax burden: $40,000 per year
-- Share of gross income: 8.4%

$2000k income cut
-- avg. $4000k income in cohort (my estimate)
-- Top 0.1% of HH
-- 118,000 households in cohort
-- Average incr. tax burden: $340,000 per year
-- Share of gross income: 8.5%

These together would equal $160 bn in revenue per year.

Now, the deficit in October was $120 bn. So this tax increase would finance about 6 weeks of the deficit. Who finances the other 46 weeks?

Posted by: Steven Kopits at November 14, 2012 03:15 PM

The DOW is down now more than 1,000 points in less than a month.

Goodness, imagine how bad it would be if Romney had been elected!

Posted by: Steven Kopits at November 14, 2012 03:27 PM

"Goodness, imagine how bad it would be if Romney had been elected!"

Let me remember who was in office when the stock market, housing market and just about every other financial enterprise was collapsing or near collapse? I think it was that guy from Texas, what was his name? Darn how easy it is to forget great presidents who killed Osama and found the Iraq nuke weapons. Who was that guy?

Posted by: dilbert dogbert at November 14, 2012 06:01 PM

I made essentially the same criticism in a comment: I'd like to see effective rates analyzed. But the study looked at top marginal rates and accurately found they had no relation. So yeah.

Posted by: jonathan at November 14, 2012 06:20 PM

2slugs

It's clear that a key part of the Progressive strategy relies on creating loopholes in the tax code that favor the special interests of the Progressives - unions, greenies, etc. There is no other reason for the left to fight it as they do. Put some constraints in the legislation if you fear more loopholes will reappear in the future.

Let's assume Obama gets his entire tax rate increase on the "rich". Show me the math how you get the rest of the way to a fiscal solution that does not require another tax increase the next time the economy slips into recession.

Posted by: tj at November 14, 2012 06:46 PM

The 2011 CRS report does NOT use any legitimate measure of the effective marginal tax rate on labor or capital - which would incorporate federal, state, and local taxes for both individuals and businesses.

In the case of labor supply, the 2011 CRS report totally misstates the results of the Ohanian/Raffo/Rogerson study.

Posted by: Steve Robinson at November 14, 2012 06:52 PM

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Source: http://www.econbrowser.com/archives/2012/11/the_republican.html

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