kNOw Nothings

November 5th, 2012 at 2:38 am

We live in a compressed news cycle and yes, I’m hearing something about a forthcoming election, but I’m not finished ranting about the fact that Republican censorship led the non-partisan CRS to withdraw this report.  The report found no correlation between levels or changes in top individual or capital gains tax rates and a number of outcome variables related to savings, investment, growth, or productivity.

In other words, its findings failed to support the supply-side, trickle-down tax policies that is the only game Republicans have brought for decades.  Therefore, it had to go.

As I’ve noted before, the report itself, by Tom Hungerford, was solid, careful, and unremarkable in that its findings were consistent with other work by those looking but not finding evidence in support of the supply-side case.  In fact, it’s interesting that opponents of the study, while highly critical did not say: “the CRS study contradicts these findings by so-and-so!”

That’s because the trickle down case is made almost wholly by assertion.  And every time you bring evidence against it, there’s something wrong with your evidence.  The GW Bush years weren’t a good test, they say, because he spent too much.  The Reagan years were a good test, even though he raised taxes 11 times and his spending as a share of GDP was actually higher than Bush’s.

It’s thus demonstrably a waste of time to hit back with facts, but once more into the breach.  I thought I’d look at what some of the critics said about the CRS study and test their critiques against the data.

The CRS study didn’t look at the corporate tax rate.  See figures 3-5 in the CRS study for scatterplots that show no relation between the top tax rates in the study and the outcome variables.  Here’s a plot showing the same thing for the top corporate tax rates over time against real per capita GDP growth.  The slope goes the “wrong” way—higher tax rates associated with faster per capital growth, but it’s insignificant.

Sources: Tax Policy Center and BEA NIPA.

And if you plug the change in the corporate rate into the CRS regressions (with lags!—see below), it is statistically insignificant, just like the other tax variables (I reran the regression with real per capita income growth as the dependent variable).

The CRS study didn’t add dynamics.  Ahh, the lag structure critique—the last refuge of a statistical scoundrel.  Never mind that those who proffer this supply-side fairy dust forget to mention it will take years before it kicks in—to the contrary.

But the CRS regressions did not include any lags in the tax variables to capture their enduring effects, as in last year’s tax cuts generate this year’s growth and snark aside, it’s a legitimate question.  Hungerford reported that he tested for lags and it didn’t change the results.  I did too, using two years of lags in the tax variables (more distant lags didn’t help) and even including the corporate tax variable.  Joint tests of significance for the three tax variables and their lags were all insignificant.

Based on these results, I fully expect the editorial board of the Wall St. Journal to pen a massive apology to their readers.  Let me suggest the opening:

You know those trickle down tax cuts we’ve been advocating forever—the ones Mitt Romney is running on?

Um…never mind.

WSJ: if you hurry, there’s still time to get this out before the election!

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3 comments in reply to "kNOw Nothings"

  1. jonathan says:

    What I saw as responses were mostly non-responsive mentions of tax issues at the other end of the scale. That, to me, reflects the deep-seated mental chains this issue wraps around minds. The question was high-end tax rates and their effect, but people can’t that from separate low-end taxation because they can’t focus on the issue and need to deflect, deflect, deflect.

    My only issue with the study was that I couldn’t – at least in quick read – see the size of the groups paying the marginal rate. That is, assume a marginal rate of 99% but it only applies to 5 people and the next marginal rate is 70% and it applies to the top 2.5% of taxpayers. Would you look at the 99%? I wouldn’t. I couldn’t tell from the paper, but maybe I’m wrong.

  2. pjr says:

    Not to be non-partisan, but is it not worth noting that the Democrats control the Senate Finance Committee that requested the CRS study? Its chairman, Max Baucus (D), seems to have never met a tax on the wealthy that he didn’t want to cut–i’s not just the GOP that finds “trickle down” to be a convenient theory to support their political agendas. When Romney and others talk of bipartisan compromise, I believe Baucus is the type of Dem that they have in mind.

  3. Fred Donaldson says:

    The trickle down theory benefits society when the wealth spent by the rich produces something of value – not seven mansions used by two or three folks some of the time and vacant the rest. That the wealth will only benefit the nation where it is spent, and not if it is spent for selfish materialism, instead of general needs and infrastructure. Mellon libraries jump to mind as such positive trickles.

    We have gone beyond the Madison Avenue refutation of truths in favor of sales pitches, which ignore facts in favor of exploiting emotions. Surely, some ad genius once hoped he could forbid the promoting of any products in competition with his clients’ goods, but alas it was impossible. The defenders of low taxes for the wealthy seem ready to defy rules, common sense and even decent contrary discourse to sell us their snake oil.

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