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1 William McBride, What Is the Evidence on Taxes and Growth 1 (2012)

handle is hein.taxfoundation/srcahxz0001 and id is 1 raw text is: TASpecia Reort FOUNDATION December 18, 2012 No. 207 What Is the Evidence on Taxes and Growth? By William McBride, PhD Introduction The idea that taxes affect economic growth has become politically contentious and the subject of much debate in the press and among advocacy groups. That is in part because there are competing theories about what drives economic growth. Some subscribe to Keynesian, demand-side factors, others Neo-classical, supply-side factors, while yet others subscribe to some mixture of the two or something entirely unique. The facts, historical and geographical variation in key parameters for example, should shed light on the debate. However, the economy is sufficiently complex that virtually any theory can find some support in the data. For instance, the Congressional Research Service (CRS) has found support for the theory that taxes have no effect on economic growth by looking at the U.S. experience since World War II and the dramatic variation in the statutory top marginal rate on individual income They find the fastest economic growth occurred in the 1950s when the top rate was more than ninety percent.! However, their study ignores the most basic problems with this sort of statistical analysis, including: the variation in the tax base to which the individual income tax applies; the variation in other taxes, particularly the corporate tax; the short-term versus long- term effects of tax policy; and reverse causality, whereby economic growth affects tax rates. These problems are all well known in the academic literature and have been dealt with in various ways, making the CRS study unpublishable in any peer-reviewed academic journal.' So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant 1 The top marginal tax rate is the rate that is paid on each additional dollar of income. 2 Thomas Hungerford, Congressional Research Service, Taxes and the Economy: An Economic Analysis of the Top Tax Rates since 1945 (Updated) (Dec. 12, 2012), http //democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/Updated% /2CRS0 %2ORelport%/o201200 3A13%3A12.pdf. 3 William McBride, CRS, At Odds with Academic Studies, Continues to Claim No Harm in Raising Top Earners' Tax Rates, TAX FOUNDATION TAX POLICY BLOG, Dec. 14, 2012, htp:itaxfoundation.org/blog/crs-odds-acadenic-studies-continues-claim-no- h Arm -r li6 n --rotn-eA rn er-rAy-rirrt

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