Now that the presidential race is in full swing, the problems facing the country will be increasingly narrowed down to binary terms, as if the voting populace couldn't handle any choice more nuanced than what you'd find on an Applebee's menu. With the exception of foreign policy — both candidates seem pretty cool with the whole illegal drone war and the collateral damage of innocent civilians/American citizens — the campaigns of President Barack Obama and challenger Mitt Romney are doing their best to carve out definitive talking points. Both are attempting to make their respective platforms as ideologically distinct as possible, even if at times the end result resembles Coke versus Pepsi.
Although this purposeful dumbing down of issues leaves many casualties in its wake, there's one economic policy matter that remains clear enough despite the campaign season's typical distortions and lies: taxes. Should we raise them, and on whom should they be raised? Should we even raise them at all? Should we then lower them, and if so, for whom?
The answer, of course, depends on which candidate you ask. For the record, Obama wants to preserve Bush II-era tax cuts for only those Americans making less than $250,000 a year, whereas Romney's somewhat murky proposal would primarily extend those cuts for all Americans, including the nation's wealthiest citizens.
Par for the course, the issue has been reduced to its lowest common denominator: Should the country's wealthiest be taxed fairly, or taxed less to spur economic growth? In the hopes of providing a definitive, objective answer to this perennial political question, the nonpartisan Congressional Research Service has weighed in with its own study, and has concluded that 65 years' worth of tax cuts for the nation's wealthiest citizens did not correlate with economic growth.
In fact, according to the report, such supply-side policies instead contribute to income inequality, which is a drag on the overall economy (not to mention catalyzing the creation of movements like Occupy Wall Street in a chickens-coming-home-to-roost kind of way).
From the CRS report (bold emphasis Pith's):
The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, 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. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.
However, facts and their checkers aren't to be dictating this year's campaign anyhow, so might we interest you in this video of a squirrel riding a miniature jet ski?