“The data speaks”: Tax hikes for wealthiest Americans won’t destroy the economy

The title of this post quotes Bill McBride at Calculated Risk, who cites a couple of key pieces regarding the likely economic effects of tax hikes on the rich.

And those effects will be minimal and maybe even nonexistent given the very modest increase proposed by the Obama administration. We’re not going to solve the deficit with an increase in tax rates on the wealthiest Americans, but such an increase would still make a difference.

Before I continue to the numbers, I want to say that I’ve been surprised over the last few years to realize that so many Americans simply reject data collected and analyzed by independent scholars, economists, government workers following strict methodology, and other experts. So many Americans just want to go with their gut — they want to believe, well, what they believe.

That’s not the way I was raised to think. That’s certainly not the way I approach my columns in the Savannah Morning News or my blog posts here. Sure, statistics can be simply wrong for a variety of reasons, much of our key economic data is estimated (but over time shows clear patterns), and political commentators frequently skew the numbers to bolster their own positions.

But that doesn’t mean we don’t have good data. And in the case of something like the effect of marginal and effective tax rates on the overall economy, we have mountains of historical data. (By the way, the marginal tax rate is the percentage in taxes paid on the last dollar of income; the effective tax rate is what Americans are actually paying.)

So this from the Congressional Research Service: Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (Updated)

From the conclusion:

The results of the analysis in this report 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 statutory 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. But as a small proportion of taxpayers are affected by changes in the top statutory tax rates, this finding is not unexpected.

However, the top tax rate reductions appear to be correlated with the increasing concentration of income at the top of the income distribution

And the graphs. The first two detail the history of tax rates on the highest earners:

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This one shows the percentage of total income going into the hands of the highest earners, with about 5 percent of all income going to the top .01 percent (1/10,000 of the population).

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