Thursday, November 15, 2012

Republicans fight reality with rhetoric once again

The Republican Joint Economic Committee recently released an article entitled: Historical Tax Rates: Rhetoric vs. Reality. This article was an attempt to attack a recent Congressional Research Service (CRS) report which found that changing the top marginal tax rate had little effect on the economy. The problem is, that despite this article's title alleging combating rhetoric with reality, the Republican article is full of its own rhetoric and its own misleading statistics. But to be nice I will start with the one thing that they correctly stated:
While the effective marginal income tax rate is more relevant than the top statutory income tax rate, neither rate fully reflects the overall burden of taxation on the economy. A comprehensive measure would include every kind of tax (income, sales, property, estate, etc.) collected at every level of government (federal, state, and local). Without a more complete measure, it is impossible to accurately determine how much or how little taxes affect the economy. (emphasis added)
You would think that after pointing out that it is impossible to accurately determine how taxes affect the economy without comprehensive analysis that Republicans would stop their parties mantra that increasing tax rates will negatively impact the economy. You would also think that they would then advocate doing more research to determine the effects of higher taxes on the economy. But rather than waiting for that sort of analysis they put on their hypocrite pants and state:
Given the much greater share of income now subject to the top [tax] rate, any future [tax] rate increase will have a much greater effect on the economy.
It doesn't get much worse than this when an article waits only 4 paragraphs to completely contradict itself. I wonder whether the authors merely forgot that they wrote it was impossible to accurately determine how much or little taxes effect the economy without more data or whether they are just so trapped in their own ideological world that they forgot reality also applies to them.

Unfortunately for the authors of this piece, actually the article actually does get worse. They turn the whole article into a misleading word game based on the maximum tax rates set in 1945 and in 2011. The main argument of the GOP appears to be that the maximum tax rates in the past only affected a few people. However, this ignores the fact that tax rates in the past were generally higher for everyone and higher tax rates started at lower incomes. It also ignores the analysis done by the CRS comparing average tax rates of the wealthy to economic success.

The GOP wants to claim the reason higher taxes didn't hurt the economy was because only a few people were paying the maximum tax rate. This of course ignores the fact that most people were paying higher taxes. To show why the GOP's analysis is so misleading lets look at this flabbergasting quote:
When the top rate exceeded 90 percent, the economic effects [of higher taxes] were small because the share of income affected was small. But that is no longer the case. Successive rounds of tax reform have lowered the top [tax] rate and expanded the share of income subject to it.
You might be wondering what is so ridiculous about this quote but give me a moment to explain. In the 1940s there used to be tax rates as high as 94%. These tax rates however only applied to income above $2,493,107 (indexed for inflation). Under 2011 rates the maximum tax rate was 35% and kicked in at $379,150. The Republican committee is arguing that if we raise taxes on the highest earners now it will have a larger effect on the economy than previous high tax rates because there are currently more taxpayers who pay the maximum tax rate.

This is absolutely true there are many more people who are paying the maximum tax rate than there were in 1945. But that is because the maximum tax rate in 1945 started at $2.5 million dollars instead of the $.4 Million it starts at today. Of course there are currently more tax payers paying the maximum rate because the maximum rate is lower and starts much earlier.

Thus, the Republican committee is trying to bamboozle us with an obvious fact. If you lower the starting point for the maximum rate, then more people will pay the maximum tax rate. If you are still confused by why the Republican committee is being so misleading let me use one more example.

In 1945 there were a lot more tax brackets than there are today. But lets look at today's top tax rate of 35%. Currently our tax rate of 35% only applies to those who make more than $379,150. 1945 didn't have a 35% rate bracket but they did have a 37% rate bracket. If we account for inflation that rate bracket started at $99,724. In other words, in 1945 the 35% rate bracket applied to much poorer people than it does today.

This comparison of tax rates makes much more sense. What we can see from this is that the 37% rate bracket in 1945 which is comparable to today's maximum tax rate would apply to many more people today.

If you look at the table to the right I have compared 1945's tax rates (adjusted for inflation) to today's tax rates. The table shows how today's top tax rate started at a much higher amount than it did in 1945. The Republicans don't want you to think of it this way. They want you to compare today's 35% rate to yesterdays 94% rate that started at $2.5 million.

Thus, the Republican argument that we can't raise the maximum tax rate because it would affect many more people is just a word game. Yes, more people might be affected by the maximum tax rate today. But that's because the maximum tax rate is lower and starts at lower incomes. In effect the Republicans really appear to be arguing that we should be creating whole new rate brackets for higher income earners that would only apply to higher incomes. Maybe they are right, maybe we do need more income brackets like there were in 1945.

I want to address one more misleading item in the Republican committee article before I finish. The GOP article states that the share of adjusted gross income reported by taxpayers subject to the top marginal rate peaked in 2007 prior to the last recession as shown by the chart taken from the GOP report below.

It is totally unclear why the GOP would even post this. It is an obvious result of a recession. When the country goes into a recession we would expect less people to pay the maximum tax rate because fewer people will earn enough to be taxed at that rate. Perhaps the GOP is trying to show that when more people pay higher taxes it hurts the economy. But that isn't what the table shows. It just shows that fewer people will be subject to the maximum bracket if people make less.

I want to point out that I agree with this Republican committee on one point. It will take more research that accounts for many variables to determine what effects taxes have on economic growth. The CRS report they criticize is just one report and it will take more like it to develop a clear picture of the relationship between taxes and economic growth. But this street goes both ways. If the GOP wishes to criticize the CRS for failure to account for all variables before reporting they should also cease their political party tagline that lower taxes boost the economy. They can't have it both ways.

It is hypocritical for the GOP to criticize the CRS for drawing conclusions from an incomplete data set but then continue to claim that taxes hurt the economy without presenting their own data analysis. I am not arguing that the GOP are wrong. It is very possible that higher taxes could harm the economy. But, they cannot claim that without providing solid evidence.

The biggest irony of this article is that the Republican committee stated that when we tax the wealthiest at very high rates (such as 90%) it will have little effect on the economy because it only affects a few people. As the GOP committee said: "Exorbitant tax rates don't have much effect on the economy if they don't affect much income." Thus, if we ignore the rhetoric and misleading statements the take away is that it wouldn't hurt the economy too much if we taxed the extremely wealthy at high rates.

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