The Great Tax-Cut Experiment
Posted on February 21, 2013 by Marc
to read Gerald Friedman’s “The Great Tax-Cut Experiment” from Dollars and Sense, January/February 2013, click on
Comparisons with Other Countries: Americans pay a smaller proportion of total income in taxes than do people in any other advanced capitalist economy. As recently as the late 1960s, taxes accounted for as high a share of national income in the United States as in Western European countries. After decades of tax cuts, however, the United States now stands out for its low taxes and small government sector. (See Figure 2.)
Figure 2: Tax Revenue as a Percentage of GDP, 2008
Higher Growth When Taxes Are Higher: On average, the economy has grown faster during presidential administrations with higher tax rates on the richest Americans. Growth was unusually slow during George W. Bush’s two terms (Bush II) and during Obama’s first term, when the Bush tax cuts remained in effect. On average, every 10 percentage-point rise in the average tax rate on the richest has been associated with an increase in annual GDP growth of almost one percentage point. (See Figure 3.)
Declining Tax Rates Haven’t Stimulated Investment: Cutting taxes on the richest Americans has not led them to invest more in plant and equipment. Over the past 50 years, as tax rates have declined, there has been no increase in investment spending as a percentage of GDP. (The flat trend line shows that changes in the highest marginal income-tax rate have not affected investment much, one way or the other.) Instead, the investment share of the economy has been determined by other factors, such as aggregate demand, rather than tax policy. (See Figure 4.)
Lower Taxes, Slower GDP Growth: Despite lower and declining tax rates, especially on the rich, the United States has had slower productivity growth over the last several decades than other advanced economies. Overall, lower taxes are associated with slower growth in GDP per hour worked. A 10 percentage point increase in taxes as a share of GDP is associated with an increase in the productivity growth rate of 0.2 percentage points. (See Figure 5.)
GERALD FRIEDMAN is a professor of economics at the University of Massachusetts-Amherst.
SOURCES: Tom Petska and Mike Strudler, “Income, Taxes, and Tax Progressivity: An Examination of Recent Trends in the Distribution of Individual Income and Taxes” (Statistics of Income Division, Internal Revenue Service, 1997); Thomas Hungerford, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945” (Congressional Research Service, 2012); Economic Report of the President, 2012; Bureau of Economic Analysis (bea.gov); Organization of Economic Cooperation and Development, OECD STAT.
Corporate Taxes as % of Profits (1950-2010)
U.S. Corporate Tax Rate Plunges To 40 Year Low Of 12.1 Percent
By Pat Garofalo on Feb 3, 2012
In recent decades, corporate tax revenue has plunged, falling from about 6 percent of gross domestic product in the 1950?s to less than 2 percent today, due to a proliferation of corporate tax breaks and the use of offshore tax havens. According to the Congressional Budget Office, in fact, corporate tax receipts as a share of corporate profits have hit their lowest point in 40 years:
Corporate tax receipts as a share of profits are at their lowest level in at least 40 years.
Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That’s the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.
Even the 25.6 percent share of profits that went to corporate taxes over the last quarter century comes in below the top statutory corporate tax rate of 35 percent. Meanwhile, corporate profits are currently at a 60 year high, rebounding back to above where they were before the Great Recession hit.
At the same time that corporations are pulling in huge amounts of money, workers are seeing their wages shrink. Last year, real wages fell by 2 percent, and “many employees are also working longer hours and getting more done without raises or overtime pay.” “Part of the reason why business profits are so high is it is a zero-sum game, so labor is on the losing end of that,” said Aaron Smith, senior economist at Moody’s Analytics. “Businesses are getting more out of each worker they have.”