Yet Another Study Suggests that Cutting Tax Rates Doesn’t Boost Economic Growth

Do lower tax rates produce higher economic growth? The evidence in favor of this theory has always been thin, especially when tax rates are fairly modest, as they are in the United States. Everyone agrees that taxes produce deadweight losses, but those losses are fairly small and are often offset by the benefits that a strong central government provides to an economy. When you net everything out, low tax rates don’t seem to have a big effect.

But this is in the news yet again, since Mitt Romney promises that his tax plan will be revenue neutral because his tax cuts will supercharge the economy and thus produce extra revenue to make up for his tax reductions. So the Congressional Research Service took another look at this question for the period 1945-2010, and the results are pretty gloomy for the supply siders and their dynamic scoring methods. Low tax rates appear to be associated with:

  • Higher investment
  • Lower savings
  • But no change in growth rates

None of these three results were statistically significant, but a fourth result was: lower top marginal tax rates mostly benefit the rich, leading to much higher income inequality. The study found similar results for capital gains tax rates. All the charts are below and the full study is here.

One caveat: Generally speaking, marginal tax rates were high from 1945-1980 and low from 1980-2010. So the CRS results might just be an artifact of the fact that growth was higher during the postwar period and lower during the post-Bretton Woods era. In other words, it might have nothing to do with tax rates. But of course, that’s the point. Nobody thinks that raising taxes is actively good for the economy, except to the extent that it helps balance the federal budget. The question is whether there’s any evidence that lowering taxes boosts economic growth. And there really doesn’t seem to be.

$500,000 MATCHING GIFT

In 2014, before Donald Trump announced his run for president, we knew we had to do something different to address the fundamental challenge facing journalism: how hard-hitting reporting that can hold the powerful accountable can survive as the bottom falls out of the news business.

Being a nonprofit, we started planning The Moment for Mother Jones: A special campaign to raise $25 million for key investments to make Mother Jones the strongest watchdog it can be. Five years later, readers have stepped up and contributed an astonishing $23 million in gifts and future pledges. This is an incredible statement from the Mother Jones community in the face of the huge threats—both economic and political—against the free press.

Read more about The Moment and see what we've been able to accomplish thanks to readers' incredible generosity so far, and please join them today. Your gift will be matched dollar for dollar, up to $500,000 total, during this critical moment for journalism.

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate

We have a new comment system! We are now using Coral, from Vox Media, for comments on all new articles. We'd love your feedback.