Tuesday, November 27, 2012

The Supply Side Myth Destroyed Once Again

For those who tenaciously persist in supporting supply-side economic tenets, here is another dagger in your heart. A senior Congressional Research Service staffer and Ph.D. economist (University of Michigan) – Thomas Hungerford - recently authored an economic analysis of reductions in the top marginal tax rates since 1945 and their relationship to economic growth and development.  A central tenet of the Republican “con” is of course that tax cuts for the wealthy will have dramatic trickle down benefits that will massively stimulate the economy.

Before describing the results, I should note that the report, while initially released on September 14 by the CRS - a non-partisan arm of the Library of Congress (http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf),  it was pulled back by Senate Republicans and Senate minority leader Mitch McConnell.  According to the New York Times, McConnell and other senators “raised concerns about the [report’s methodology] and other flaws.” More temperate Republicans of course note that the report is accurate and is difficult to refute http://economix.blogs.nytimes.com/2012/11/06/republicans-censor-what-they-cant-refute/

As soon as I read the author’s appendix (which referred to a variety of very careful multivariate tests and corrections for heteroscedasticity as well as auto-correlation in a time series analysis), I was convinced that the Kentucky senator’s methodological concerns were shaped by the same band of Republican analysts that served Karl Rove so well in Ohio during the presidential election.

After a series of time series analyses Hungerford concluded two things:

a)    first, that changes in the top marginal tax rates over a 65 year study period had virtually no discernible effect upon economic growth (savings, investment, or productivity growth) – thus clobbering empirically a central tenet of supply siders;  we appreciate this intuitively since during the 1950s the top marginal tax rate was above 90% and the per capita GDP increased by 2.4% during this period. while in the 2000s the highest marginal tax rate was below 40% yet real per capital growth in GDP was less than 1%;

b)   however, top tax rate reduction does increase the concentration of income at the top of the distribution. Thus, as Hungerford observes, the share of income accruing to the top 1/10th of 1 percent of U.S. families increased from 4.2% in 1945 to 12.3% by 2007.  In short, while marginal tax rate reductions for the wealthiest among us may have no discernible effect upon overall economic productivity, or the size of the entire economic pie, it certainly appears to have very direct effects upon the way in which that economic pie is sliced up – with larger and larger pie shares going to the wealthy.

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