Congressional Research Service Report On Tax Cuts For Wealthy Suppressed By GOP

Ryan Grim  | Huffington Post

The New York Times reported on Thursday that Senate Republicans applied pressure to the nonpartisan Congressional Research Service (CRS) in September, successfully persuading it to withdraw a report finding that lowering marginal tax rates for the wealthiest Americans had no effect on economic growth or job creation.

"The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical," the Times reported. Democrats in Congress, however, have resurfaced the report and published it in full. It can be read below.

Republicans told the Times they had issues with the tone, wording and scope of the report, but they clearly objected most strongly to its findings, which undermine the governing fiscal philosophy of the party, that tax cuts for the wealthy will spur growth and benefit everybody.

GOP officials told The Times that the decision by the CRS came after a cooperative discussion, but Democrats have suggested that the move is part of a broader effort by Republicans to squelch legitimate research that runs counter to their economic principles.

The CRS report, by researcher Thomas Hungerford, concluded:

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.

Rep. Sandy Levin of Michigan, the top Democrat on the Ways and Means Committee, demanded the CRS explain its decision. "The impartial research and advice provided by CRS experts informs and strengthens the work of Congress. However, this valuable role hinges on the impartiality of CRS analysts and their freedom from political pressure. As with other non-partisan institutions, subjecting CRS analysts to political considerations undermines the legislative process and the American people’s trust in it," Levin wrote in a letter to CRS. "Therefore I was deeply disturbed to hear that Mr. Hungerford’s report was taken down in response to political pressure from Congressional Republicans who had ideological objections to the report’s factual findings and conclusion."

(Scroll down for Hungerford's response in the UPDATE.)

The report is extensive, but the reasoning behind its conclusion is fairly straightforward. The richest Americans are the least likely to spend extra money they get as a result of a tax cut, and are more likely to save it or invest it offshore. Those on the lower end of the economic spectrum, meanwhile, are the most likely to spend transfer payments they receive from the government.

A release by the Democratic Policy & Communications Center on Wednesday accused Republicans of attempting to bury the report because its "findings undermine a central tenet of Republican party orthodoxy on taxes." They included a copy of the original report, which is available below:

 

 

UPDATE: 5:45 p.m. -- Thomas Hungerford, the CRS researcher who produced the report, told HuffPost that he stands by it. "Basically, the decision to take it down, I think The New York Times article basically got it right, that it was pressure from the Senate minority to take it down," Hungerford said. "CRS reports go through many layers of review before they're issued and as far as the tone and the conclusions go, people who specifically look at the writing and the tone said it was okay. So it's not going to be that and as I can tell you outright, I stand by the report and the analysis in the report." Hungerford said that he had never experienced suppression like this before, and he pushed back on the GOP argument that he had only looked at the effect of tax cuts in the year immediately following enactment. Regardless, he said, Republicans argue that tax breaks for the rich will bring an immediate benefit to the economy, so their criticism is inconsistent. "I checked out three years and then five years and found that no, it doesn't change the results or the conclusion of my paper. So in a way, I find it interesting that they keep talking about the need to lower the top tax rate in order to stimulate the economy now," he said. 'It sounds like they're being a little inconsistent here." Despite the pressure, Hungerford said he'll continue doing his job in a nonpartisan way. "I'm not going to change. My job is to do economic analysis on issues that the Congress is comparing and quite frankly, I'm going to continue doing that. That's my job," he said. The Times reported that Hungerford has given $5,000 this election cycle to Democrats. HuffPost asked if that biased his report in any way. "I leave any political baggage at the door when I walk into my office and pick it up on my way out. I'm there to provide help to members of both parties, which I do," Hungerford said.

Unemployment And Marginal Tax Rates

What the Numbers Tell Us
by JOSHUA A. CUEVAS

We, as a nation, are now in our 5th year since the beginning of the greatest recession we’ve seen since the great depression (Federal Reserve Bank of Minneapolis, 2012). Indeed, at least one prominent economist and Nobel Prize winner has made the argument that we are in a second depression (Krugman, 2011). At the same time, perhaps predictably, U.S. school systems have been increasingly under funded with well over one hundred thousand teachers having been laid off nationally, even by the most conservative estimates (Kessler, 2012). But unemployment has been stubbornly high, above 8% for four years running (U.S. Department of Labor, 2012). People are out of work, therefore tax revenues are down, so schools, law enforcement, fire departments, etc. will have to survive on smaller budgets, while they are simultaneously expected to improve their services under increasingly austere conditions. Or so the argument goes. Tax revenues and tax rates cannot be augmented until we have a strong economy once again, so we will have to make due. We cannot possibly consider increasing taxes on anyone during a recession. This is a logical and persuasive argument, or so it would seem, one that many of us have heard trumpeted loudly in recent years.

This argument suggests that the strength of the economy is the driving force that determines the amount of revenue available to fund public services across the country. In other words, a stronger economy will bring in more tax dollars because more people will be employed. Simple enough. Except that for the last three decades, politicians, think tanks, and special interest groups have been making the case that lower taxes will strengthen the economy because it frees up capital for job creators and those in the private sector to then spend, thus keeping businesses thriving and people employed. This argument presupposes a cause and effect relationship. It suggests that low tax rates lead to more money circulating through the system, creating a stronger economy and lower unemployment. To test this claim we can examine, empirically, two essential parts of this equation: We can test the relationship between marginal tax rates and unemployment (with low unemployment acting as an indicator of a strong economy). We can ask the question; do low tax rates correlate with low unemployment and vice versa? If indeed they do, then it would lend validity to the argument that increased tax revenues should only take effect after the economy recovers and unemployment drops.

The Longitudinal Trend in Tax Rates: 1932 – Present

Before we answer this question it is worthwhile to examine recent trends in one part of this equation: marginal tax rates. Pundits, politicians, media personalities, and the person on the street may make the case that current tax rates are “sky high”, suggesting that Americans now pay a higher percentage of their incomes than the historical norms. But does the data support this notion? When we consider the top marginal tax rates since prior to World War II, the answer is an emphatic no (Tax Foundation, 2012). There has been a clear and continuous downward trend in the top marginal tax rates since 1932, and Americans now enjoy the lowest tax rates they have in three generations. The current marginal tax rate for those in the highest bracket is 35%, the same as it’s been for the last decade and the lowest it’s been in 80 years, with one brief exception that we will discuss shortly. When President Clinton was in office the highest bracket was 39.6%. Interestingly, when Reagan was president and tax reduction became a staple of the Republican platform, the highest bracket was 50% for most of his 8 years in office. The two decades prior to that it was 70%, and from 1963 back until 1945 it was 91%. In 1945 it was 94%. So the point is clear when you examine the actual numbers: Taxes have never in modern history been lower in the U.S., except for the following caveat.

There was an interesting anomaly from 1988 to 1992 when the highest tax rate dipped to between 28% and 31% (Tax Foundation, 2012). And what happened to the economy during that time of low taxes? There was a large recession beginning in 1990, one that pales by today’s standards, but a significant one by historical standards (The Economist, 2011). President G.H.W. Bush saw the harm this was doing to the economy and raised taxes, breaking his “Read my lips- no new taxes” pledge. This of course was one of the factors that caused him to lose the election in 1992. Prior to that, in 1982, there was another tax cut (Tax Foundation, 2012) and another deep recession (The Economist, 2011), leading to the two highest back-to-back yearly unemployment rates we have seen since the great depression- 9.7% in 1982 and 9.6% in 1983 (U.S. Department of Labor, 2012). Our latest tax cut went into effect in 2003 and within five years the Great Recession was well underway. It would seem that tax cuts correspond with big recessions. When you subtract the substantial amount of money that wealthy individuals and large corporations contribute to our federal government and the overall economy, bad things tend to happen to that economy.

But while the tax part of our equation shows a clear pattern- a consistent downward trajectory for 80 years, with tax cuts tending to correspond with recessions- the second part is less clear. Since World War II the unemployment rate each year has fluctuated with no discernable pattern to the naked eye, from a low of 2.9% in 1953 to a high of 9.7% in 1982, and a wide variety of levels across the years (U.S. Department of Labor, 2012). So it was determined that inferential statistics would be needed to analyze the relationship between the top marginal tax rates and unemployment since 1948, when the first unemployment statistics where available through the U.S. Department of Labor.

Analysis: Correlating Marginal Tax Rates and Unemployment

The data for the top marginal tax rates (Tax Foundation, 2012) and the unemployment rates for each year (U.S. Department of Labor, 2012) from 1948 to 2011 were compiled. These numbers were entered into a Pearson product-moment correlation analysis, two tailed, to test for the strength and direction of correlation and for statistical significance. The results indicated that there was a statistically significant negative correlation, r(64) = -.31, p = .013, in the relationship between top marginal tax rates and the unemployment rate in the 64 years from 1948 to 2011. This means that when taxes were high, during that same period unemployment tended to be low, suggesting a stronger economy. And when taxes were low, during the same period unemployment tended to be high, indicating a weaker economy. It is important to note that this is not a political argument; it is a mathematical one. This is what the numbers tell us when this statistical analysis is conducted.

Now there are a number of issues to consider in this analysis. First, 64 years is a relatively small sample size (N = 64). With a sample size this small we would often not expect to see a statistically significant correlation. In many cases there simply would not be enough data for the probability to reach .05, much less .013. But even with this relatively small sample size, the association between tax rates and unemployment did prove to be significant, which suggests that longer trend lines, perhaps 80 or 100 years, would reveal a more pronounced relationship between those variables. The more data you have, the clearer the relationship often becomes, as long as that relationship is not due to random chance. And this analysis suggests the relationship between the top marginal tax rates and unemployment is not due to random chance, or at least we are 98.7% certain that it is not.

Another thing to keep in mind is one of the first concepts we teach students in introductory statistics and research courses: correlation is not causation. We cannot make the claim that one variable in this equation causes the other variable, even though they clearly seem to be associated with one another. In fact, we know that unemployment rates do not cause the top marginal tax rates to be what they are at any given time. Top marginal tax rates are set (caused) by the laws implemented by state and federal legislatures. Even if one were to argue that law makers’ decisions on tax policies are influenced by unemployment rates, the election cycle and legislative cycle normally play out over a number of years, sometimes decades, when unemployment often fluctuates a great deal, so it is not reasonable to contend that unemployment rates cause the marginal tax rates to be what they are. However, it is quite plausible that top marginal tax rates have a causal effect on the unemployment rate, particularly since those tax rates have shown a steady and consistent downward pattern and may only change once or twice per decade. In other words, it is possible that the top marginal tax rates may be one of the primary factors that dictate the unemployment rate and the strength of the economy at any given time. But since we are dealing with a correlation, we cannot claim to have isolated that variable as a cause, and it is quite probable that other factors are in play despite the clear relationship between the two variables.

However, a correlation does not rule out causation, of course, and if there is causation in this relationship, then it can only be unidirectional. The unemployment rate cannot dictate tax rates. We know what causes tax rates to be what they are: laws enacted by legislatures. So if there is a cause and effect relationship present, it could only be in the opposite direction, with tax rates influencing unemployment rates. But a critic could legitimately argue that examining tax rates and unemployment rates during the same year is ineffective because if tax rates were indeed affecting fluctuations in the unemployment rate, the impact would not appear until the following year or later. A proponent of the hypothesis that low tax rates allow job creators to expand their businesses could credibly make a case that when tax rates are reduced it takes at least a year or two for the effects to be seen in the unemployment rates, making a year-to-year comparison invalid. Essentially, the possible positive effects of the tax reduction haven’t had a chance to take hold yet in the same year that rates are reduced. The critic could assert that while comparing tax rates to unemployment rates in the same year may show a negative correlation, subsequent years may show a positive correlation once the job creators have had a year or two to put that extra capital back into the system.

For this reason a Pearson correlation was conducted comparing the top marginal tax rates for each year to the unemployment rates the following year for every year from 1948 until 2010 (as of 2012 when the analysis was done, the tax rates for 2011 could not be compared to unemployment rates from 2012 because that data had not been released yet). Put another way, the tax rate from 1948 was compared to the unemployment rate for 1949 and so on until 2010 to account for the possibility that any effect of the tax rates may not appear until the following year. The results again indicated that there was a statistically significant negative correlation between the top marginal tax rate and the unemployment rate the following year, r(63) = -.267, p = .034. Just as in the first analysis, these findings suggest that when top marginal tax rates are low, the unemployment rate the following year tends to be high, and when tax rates are high, the unemployment rate the following year tends to be low.

The question remained as to whether this pattern would hold true if the top marginal tax rates were compared to unemployment rates two years after the fact. In essence, did tax rates appear to influence the strength of the economy two years after those revenues were collected? Based on the initial findings, and to extend the analysis even further, the decision was made to explore the relationship between the top marginal tax rates and the unemployment rates two years, three years, and four years after the fact. When tax rates were compared to unemployment rates two years later, a statistically significant negative correlation again emerged, r(62) = -.259, p = .042. When tax rates were compared to unemployment rates three years later, a statistically significant negative correlation was also revealed, r(61) = -.265, p = .039. For the analysis of four years after the fact, a negative correlation appeared, but in this case it was not statistically significant, r(60) = -.245, p = .059. This final analysis did not meet the criteria for significance for two reasons: First, with each subsequent analysis the sample size was reduced by one year. For instance, for the 2011 tax rates, unemployment figures do not yet exist for two years after that time, so 2011 had to be removed from that analysis and so on for each succeeding analysis.

Likewise, for 2010, unemployment rates do not yet exist for three years after that time. The second and more important reason for the lack of significance in the final analysis is related to the first. With each analysis, when a year was removed for lack of an unemployment statistic to compare it to, the year removed was the next most current one, so the tax data for the years 2011, 2010, 2009, and 2008 were removed with each respective analysis. This was noteworthy because these were all years with historically low tax rates (35%), and when those extremes were removed from the data set the results gravitated towards the historically higher tax rates and the correlation appeared less significant. There is no doubt, however, that when the data for 2012-2017 become available in the coming years and the current low tax rates are compared to unemployment rates for four and five years later from 1948 until the present, there will indeed be a statistically significant negative correlation, just as in the other analyses.

Interpreting the Results

What we see when examining the whole of this data is a consistent pattern: When the top marginal tax rates are compared to unemployment rates for the same year, one year later, two years later, and three years later, nearly identical results emerge. Not only is there a negative relationship in each case, with low tax rates correlating with high unemployment and vice versa, the magnitude of each relationship is nearly identical. So between 1948 and 2011, there appears to be a clear and consistent relationship between top marginal tax rates and the unemployment rate. And since unemployment rates cannot dictate tax rates, any influence must go in the opposite direction, with tax rates influencing the unemployment rates. Because we are dealing with correlations, there is a possibility that a third variable or more variables are also at play, particularly in a dynamic as complex as the U.S. economy. Indeed, it is almost a certainty that other factors are involved. But the unmistakable and highly uniform pattern revealed in the analyses reported here would lead us to believe that the relationship between top marginal tax rates and unemployment is in fact present, even if other factors are also involved.

What we can say with absolute confidence, though, is that there is no evidence here that low tax rates are associated with low unemployment, and by extension, a healthy economy. Similarly, there is no evidence that high tax rates are associated with high unemployment, and by proxy a weak economy. There is simply no empirical basis to make those claims based on this historical data. In fact, everything we see here suggests that just the opposite is true. Low marginal tax rates do not appear to be beneficial to employment rates, and if they are in fact detrimental to employment rates one would be hard pressed to make the case that they are helpful to the economy. In the most basic terms, a healthy economy is one in which the vast majority of citizens who want to work can find that work.

If one were to accept the common contention these days that we must wait until we again have a strong economy before we are able to collect the tax revenues needed to adequately fund public sector services, the data simply does not support that claim. These numbers tell a far different story. They instead suggest that while tax rates remain at historical lows we will continue to have a weak economy and high unemployment. There is no data to suggest that by keeping top marginal tax rates low it will improve the economy or decrease unemployment. For those who insist on low taxes at all costs, it would be worthwhile for them to look at the numbers and realize that pursuing low marginal tax rates, and gutting education and other social services in the process, is not the answer to a weak economy. It may be one of the causes of it, and certainly appears to be a prime factor in the equation. If we continue on the trajectory that we as a country have been on for more than 30 years of demanding lower and lower tax rates in the hopes that it will keep money in our pockets and food on the table, the data tells us we are more likely to have empty pockets and less on the table.

References
Federal Reserve Bank of Minneapolis. (2012). The recession and recovery in perspective [data file]. Retrieved from http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/
Kessler, G. (2012, June 12). Spinning the number of teacher layoffs. The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/fact-checker/post/spinning-the-number-of-teacher-layoffs/2012/06/12/gJQAgAMdYV_blog.html
Krugman, P. (2011, December 11). Depression and democracy. The New York Times, pp. A23. Retrieved from http://www.nytimes.com/2011/12/12/opinion/krugman-depression-and-democracy.html
Tax Foundation. (2011). U.S. federal individual income tax rates history, 1913-2011 [data file]. Retrieved from http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets
The Economist (2011, July 29). Recessions compared. The Economist online. Retrieved from http://www.economist.com/blogs/dailychart/2011/07/american-recessions-and-recoveries
U.S. Department of Labor, Bureau of Labor Statistics. (2011). Labor force statistics from the current population survey [data file]. Retrieved from http://www.bls.gov/cps/prev_yrs.htm/

Corporations: Yes, We're Moving Abroad to Get Lower Tax Rates

Wednesday, August 29, 2012 by Common Dreams

U.S. corporations are continuing tax dodging practices to boost their profits by the millions by reincorporating abroad, an article The Wall Street Journal on Wednesday shows.

John D. McKinnon and Scott Thurm describe how 10 companies have moved or have announced plans to move their incorporation address oversees since 2009 in an effort to lower their effective tax rate.

Alexander Cutler, chief executive of Eaton, a Cleveland-based company that has reincorporated in Ireland, said, "We have too high a domestic rate and we have a thoroughly uncompetitive international tax regime." The move is saving the company $160 million a year.

Another company that moved is Ensco, now saving more than $100 million a year in tax dodging.

Yet while companies complain of a burdensome corporate tax rate of 35% and say that was a motivating factor behind their reincorporation oversees, very few companies actually pay that rate.

A Reuters report from May describing the Eaton reincorporation lays this out as well:

The top U.S. corporate tax rate is 35 percent, the highest in the world, though few companies actually pay that much due to abundant loopholes that lower their effective rates.

The Eaton-Cooper deal comes as the U.S. Congress inches toward a broad corporate tax code overhaul. The deal could add momentum to that effort, with Republicans arguing that high U.S. tax rates can drive companies to drastic measures.

In what could be a painful drain on the Treasury over time, at least seven U.S. companies in recent months have chosen through acquisition or merger to renounce their U.S. corporate citizenship by relocating to Ireland, the Netherlands, Switzerland or other lower-tax countries.

"There have been more of these in the last two months than in the five years before," said Bob Willens, an independent tax analyst and publisher of The Willens Report.
The Eaton-Cooper deal will lead to $160 million in annual tax savings for the combined company, even though Eaton in practice already pays far less than 35 percent. That is thanks to its foreign subsidiaries, many of which are already in low-tax countries such as Luxembourg and the Cayman Islands.

In fact, many companies are paying a negative tax rate, as data from Citizens for Tax Justice show.

While there has been talk of the deficit at the Republican National Convention going on now in Tampa, there has been no talk of the impact closing corporate tax loopholes would have on the deficit.

“These big, profitable corporations are continuing to shift their tax burden onto average Americans,” said Citizens for Tax Justice director Bob McIntyre. “This isn’t fair to the rest of us, it makes no economic sense, and it’s part of the reason our government is running huge budget deficits.”

“Getting rid of corporate tax subsidies that cause such widespread tax avoidance ought to be a key part of any deficit-reduction program,” said McIntyre. “As a bonus, revenue-raising corporate tax reform would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges — things that would actually help businesses and our economy grow.”