The report, from the Congressional Research Service, finds that tax cuts for high earners can be linked to a different outcome: income inequality.
“The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced,” according to the CRS report, circulated on Friday.
The report appears to give a lift to Democrats’ calls for the Bush-era tax cuts to lapse next year on incomes above $250,000. Democrats say that low taxes on the rich merely exacerbate income inequality. Republicans say that higher taxes on big incomes would hurt the economy by damping the after-tax income of small-business owners who pay taxes through their individual returns.
The top individual tax rate for high earners has generally declined since World War II, and is at 35% currently, down from 94% in 1945, the report noted. Although capital gains tax rates have been more variable, the current 15% rate is the lowest in more than 65 years. The capital gains rate was 25% before 1965.
The government researchers found that “the top tax rates do not necessarily have a demonstrably significant relationship with investment.” The researchers also said that the correlation between economic growth and the top tax rates “is not strong,” and that any links “could be coincidental or spurious because of changes to the U.S. economy over the past 65 years.”
What about arguments that “some income inequality is necessary to encourage innovation and entrepreneurship—the possibility of large rewards and high income are incentives to bear the risks?” The researchers note the argument, but say that the most statistically significant link is between income inequality and tax cuts on the rich.
“As the top tax rates are reduced, the share of income accruing to the top of the income distribution increases; that is, income disparities increase,” government researchers said.
