We keep hearing from so-called economic conservatives that we need to cut top marginal tax rates to stimulate the economy. As the thinking goes, when the wealthy keep more of their money, they can invest and spend it on things that create jobs and grow the economy.
Call it supply-side economics, call it Reaganomics, call it trickle-down, there's just one problem with this concept: it doesn't work and has never worked.
A new study by the Congressional Research Service, called Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 [PDF link], draws the following conclusion, worth quoting at some length:
Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. 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. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.
In other words, cutting the top marginal tax rate has not resulted in increased economic growth - quite the opposite, in fact. However, cutting the top marginal tax rate has resulted in increased economic inequality.
Nor have tax cuts resulted in higher rates of productivity growth. Again, over the past 65 years, productivity has tended to grow faster when tax rates were higher, not when they were lower.
All tax cuts do is help the very wealthy to keep more of their money, while starving government of the revenues it needs to provide the public and social services we have come to expect.
Indeed, that may be the real purpose of tax cuts: not to stimulate the economy (which they don't do) or even, necessarily, to enrich the already rich (which they do), but to compel governments to cut public spending in an ideological attack on the concept of a just and civil society.