Bringing the Bubble to the Senate

Or, “Who will rid me of this troublesome study?”

From The Hill‘s On the Money:

Rep. Sandy Levin (Mich.) said he was disturbed that the Congressional Research Service withdrew the report [over tax rates and their impact on economic growth] because of political pressure, after The New York Times reported that Senate Republicans had taken issue with the study.

“It would be completely inappropriate for CRS to censor one of its analysts simply because participants in the political process found his or her conclusion in conflict with their partisan position,” Levin, the top Democrat on the House Ways and Means Committee, wrote to CRS leadership.

Staffers for Senate Republicans have confirmed that they lodged complaints over the report, and pushed back on the report quickly after it was originally released.

Antonia Ferrier, a spokeswoman for Sen. Orrin Hatch (Utah), the top Republican on the Senate Finance Committee, said in a release Thursday that the CRS report was “highly questionable” and employed “loaded political language.”

Ferrier also termed GOP conversations with CRS as “constructive,” and circulated criticisms of the study from the Tax Foundation and George Mason University.

The CRS report is available here. The studies from the Tax Foundation and George Mason University (to be specific, the Mercatus Center at GMU) are actually blogposts, and much as I think blogposts can be informative (otherwise, I wouldn’t be a blogger), I don’t think of them “studies” in the academic sense. But readers can judge for themselves: Tax Foundation and Mercatus Center. (Both authors of the blogposts are GMU Ph.D.’s)

From the NYT:

Republicans did not say whether they had asked the research service, a nonpartisan arm of the Library of Congress, to take the report out of circulation, but they were clear that they protested its tone and findings.

Don Stewart, a spokesman for the Senate Republican leader, Mitch McConnell of Kentucky, said Mr. McConnell and other senators “raised concerns about the methodology and other flaws.” Mr. Stewart added that people outside of Congress had also criticized the study and that officials at the research service “decided, on their own, to pull the study pending further review.”

So, we don’t know exactly what happened so that this study was “disappeared”. But we should find out, as the CRS is, like the CBO, a source of nonpartisan analysis that is in short supply in Washington, D.C. these days. (And, recalling what Newt Gingrich said about the CBO, I think my worries justified).

12 thoughts on “Bringing the Bubble to the Senate

  1. tj

    officials at the research service “decided, on their own, to pull the study pending further review.”
    I wonder if the report’s author, Thomas L. Hungerford, has a bias.

    Mr. Hungerford, a specialist in public finance who earned his economics doctorate from the University of Michigan, has contributed at least $5,000 this election cycle to a combination of Mr. Obama’s campaign, the Democratic National Committee, the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee.

  2. jonathan

    If you read the linked objections, you get an interesting take. The TF blog note – not a paper, as you note – makes sensible mention that the Bush tax cuts were a mix and that some of them were designed to increase progressivity through expansion of the EIC, etc. But – and it’s a large BUT – this isn’t what the study is about. The study is pretty basic: it looks at top rates and how they correlate – or not – to growth. I have no idea how the stuff about the EIC matters in that regard.
    My criticism is somewhat different: I couldn’t tell from a quick read how sophisticated the work was looking at how many paid top rates, what the average rates – which are cited – were for top earning groups, and how these changed over time. So for example, if you look at the very highest marginal rate, you need to know how many people were in that group. I could set a top rate of 99% for incomes over $1B but it would be unfair to use that to look at top rates for a larger group.
    I thought the MC criticism might raise this point when they mention the study ignores “actual incidence”, but then they veer into crap about the EIC and deductions and the like. The part about actual incidence should refer to who pays and the average rate for the top earners. That has nothing to do with lower rates, something ideologues seem to miss.
    I gather a subtext of the criticisms is that lowering top rates would be showing better if only tax cuts for the poor weren’t done. If so, then these people need to get their affairs in order before they meet their maker because that is both stupid and evil.

  3. Kevin

    Full disclosure: I was an intern at the Tax Foundation and Charles Koch Institute. I am now a grad student at Iowa State University.
    McBride is generally right here on issues with the CRS study. Over the past 70 years or so the top marginal tax rate has only changed around so much, and a lot else is not equal. Using OECD tax rates provides a much more robust panel data set by whuch researchers can look at the effects of taxes on growth. It doesnt surprise me at all that using such a limited time series did not produce significant results.
    However, both theoretical and empirical literature has converged on this topic. Capital gains and corporate tax rates are what matter. The microeconomic founded incentives of personal income taxes lead to a wide variety of countervailing forces that make its growth effect unclear.
    Raising the top marginal income tax rates probably wont change much though, especially if signaled properly. Romer and Romer (2003? I think) point out that ideological cuts tend to have a growth effect, but saying its for issues of the deficit tend to remove those issues. Similarly this months AER has a great article on job growth and firm size in the business cycle- which points out that small firms have a countercyclical hiring practice with the business cycle, and large firms a procyclical employment path. Raising taxes on the wealthy to help deal with the deficit, and lowering middle income taxes ala Obama’s plan may not be the most equitable decision, but its fairly well founded in the existing economic literature.
    Similarly, Romney’s plan to cut the corporate income tax and move to a territorial tax system is the best path on that front. So the two candidates are a bit of a wash.
    Sorry for any spelling mistakes, wrote all that on my phone!

  4. Joseph

    Kevin:”However, both theoretical and empirical literature has converged on this topic. Capital gains and corporate tax rates are what matter.”
    That would explain why the last decade with the lowest capital gains, dividends and income tax in the last 80 years has also been the worst decade of growth in the last 80 years. Oh, wait …

  5. jonathan

    I would say this is a case where I don’t care about the OECD except as a way to look at possible policy alternatives. I’m interested in this question: do lower marginal tax rates at the top generate anything like the economic growth claimed for them?
    I’ve seen a lot of work on this subject over the last decade. The linked paper is in that vein. It isn’t unusual. I have what may be some issues with how the top rate is looked at, but it’s not about capital gains or corporate taxes. That is changing the topic.

  6. Kevin

    Joseph, the whole point of econometric analysis is to try to control for as many variables as possible. Lower capital gains and corporate tax rates are not a necessary or sufficient cause for economic growth, however they do affect the rates once other major variables are controlled for. I in no way think that low, or zero, capital gains or corporat tax rates are the primary component of economic growth, but that are relevant and ‘statistically significant.’
    The reason many republican policies fail is that they think that the dynamic feedback from growth will ‘pay’ for the cuts. That doesnt seem to be the case barring cutting expenditures at the same time.
    What is important to look at with tax structures is their comparative rates of things like corporate taxes. In the post-war era the US had below average rates, today we have above average rates.

  7. Kaleberg

    We all know that high end marginal tax rates drive growth. Raise taxes and raise growth. The theory was down pat by the 1920s and certified by the experiences of the 1930s and subsequent decades. As predicted, growth stalled out after the tax cutting got serious in the 1980s.
    Basically, we’ve got accelerator pedal denialists. Despite the well documented acceleration whenever the pedal is depressed, there are tons of well paid hacks arguing that the car is going uphill, was just rammed by a bus and so on – anything but speeding up because someone stepped on the gas.
    It would be hilarious if it didn’t have such serious consequences. The US doesn’t need to become a third rate nation.

  8. Joseph

    Kevin: “What is important to look at with tax structures is their comparative rates of things like corporate taxes. In the post-war era the US had below average rates, today we have above average rates.”
    Actually, the U.S. has the lowest corporate taxes as a percentage of GDP of the OECD countries. Comparing the maximum statutory rate is meaningless since almost no large corporation pays that rate due to numerous tax deductions and loopholes. The U.S. effective corporate tax rate is below the OECD average.

  9. Kevin

    Joseph, both the CRS and PriceWaterHouse put the effective US corporate tax rate at 27%, which is still above the OECD statutory average. and today the (simple) average OECD statutory corporate tax rate is almost 25%.
    As our personal income tax rate has fallen and our corporate tax rate has stayed high, we have more pass through entitities being created then formal corporations. This is, again, supported by both the existing economic theory, and IRS data collection. Percent of GDP collected by corporate income taxes being low compared to the OECD makes sense, as they have the inverse going on.

  10. 2slugbaits

    As the Tax Foundation blog notes, the CRS study did not address the corporate tax rate, but then the Tax Foundation goes on to talk about almost nothing else. This is a strange way to critique a paper. The issue on the table is whether lower income tax rates and capital gains tax rates increase growth. William McBride is guilty of a little bait-and-switch job here. He wants to ignore the actual CRS analysis and instead wants to talk about something else.
    The Tax Foundation also fumbles the issue of transfer payments. There are two categories of transfer payments. As McBride says, the first category is primarily Social Security, Medicare and Medicaid payments. But here he is misreading the data. The step-ups he observes after 1990 actually show a flattening of the growth rates alongside level shifts. McBride has badly misinterpreted his own chart. The second category of transfer payments is related to cyclical adjustments. Those work on the aggregate demand. No Keynesian economist would argue that those kinds of transfer payments increase long run growth, except to the extent that they might stave off hysteresis effects from long term unemployment.
    Given the structural deficit the burden of proof ought to be on those who argue tax cuts will increase growth. We know that tax hikes increase revenue, so you really need strong evidence that tax cuts would significantly increase growth rates if you want to want to argue for tax cuts.
    The argument for cutting capital gains taxes is kind of bizarre. The first order effect of cutting the capital gains tax is large scale disinvestment as people sell assets at a discount to other buyers. There is no net increase in the capital stock; just a change in ownership. The growth argument assumes that people will take those capital gains and re-invest them in more productive enterprises. This is an iffy proposition at best. And of course there is no reason that those who bought the old equity shares from previous owners could not themselves invest in those more productive enterprises.
    And contrary to what Kevin claims, the positive growth effects of cutting the corporate tax rate is far from unambiguous. For example, if a firm finances capital expansion using debt rather than equity, and if interest payments are deductible, then it is far from clear that a cut in the corporate tax rate increases the capital stock. Suppose there is no corporate tax rate and the interest rate is 10%. A firm would set the new capital stock such that the marginal product of capital is also 10%. Now suppose the corporate tax rate jumps to 35% but the interest rate is deductible. The new after-tax marginal product of capital is now 6.5% with 3.5% going to taxes. But if the firm gets to deduct 35% of its interest payments the after-tax cost of capital will be 6.5%. In other words, the after-tax marginal product of capital will be 6.5% as will the after-tax cost of capital. But the key point is that the capital stock would be exactly the same. No doubt that businesses would prefer a lower corporate tax rates because after-tax profits would be higher; but the key point is that a higher corporate tax rate does not necessarily reduce the capital stock…at least to a first order approximations. Things get messier when you start introducing equity financing and depreciation allowances and inflation expectations, but those are second order effects. It makes more sense to manage the second order effects (e.g., investment tax credits) while leaving the corporate tax rate alone.

  11. don

    I have a question about the methodology used in Hungerford’s report. Namely, how is income measured? If it is just gross income reported on tax returns, the study is not worth much. With high tax rates, strenuous measures are used to keep taxable income low. One way to do this is to keep the gross reported income low. This effect is particularly strong with capital gains income, where reported income can be reduced by not realizing the gains. The Tax Reform Act of 1986 lowered rates, but the effect on revenues was muted by the response of reported income. Studies that use the reported income to examine income equality likewise would find growth in inequality as a result of the tax cuts – another completely spurious result.

  12. Obama not good on math; good at Benghazi evasion

    Tendentious: Marked by a strong implicit point of view; partisan
    From the report introduction:
    “Advocates of lower tax rates argue that reduced rates would increase economic growth, increase
    saving and investment, and boost productivity (increase the economic pie). Proponents of higher
    tax rates argue that higher tax revenues are necessary for debt reduction, that tax rates on the rich are too low (i.e., they violate the Buffett rule), and that higher tax rates on the rich would moderate increasing income inequality (change how the economic pie is distributed).”
    Notice the switch – some argue that lower tax rates would would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie). I don’t think that point is arguable. But then the report indicates that higher tax rates, especially on the “rich”, are necessary for deficit reduction and inequality reduction. And that ignores the fact that increasing taxes on the “rich” is nothing in the context of a $1 TN deficit.
    The Dems want to raise taxes on the “rich”. The Dems control the Senate and ask the CRS to give them some ammunition, and voila, you have the report. What we have here folks is an example of tendentious.
    There is more to argue with in the report (you can see some of the weasel words in the lines fitted to the graphs on pages 8-9) and the claims that real growth was higher in the 50’s, but low in the 00’s, ignoring the two recessions. My review of BEA real GDP from 83-89 (after several rounds of tax cutting) is higher than the 50’s.
    Rich Berger, using a nom de commment

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