The Reality of Raising Taxes at the Top, Part 5: Can Tax Increases Help Economic Growth?

May 1, 2012 at 9:44 am

In this blog series, and in our new report, we’ve considered how raising taxes at the top might affect economic growth.  We’ve found no convincing evidence that raising taxes at the levels that policymakers are considering would negatively affect high-income people’s reporting of taxable income, the amount they work, their saving and investment, the health of small businesses, or the rate of entrepreneurship.  But what if we look directly at the relationship between taxes on high-income people and growth?

Taxes No Barrier to Economic GrowthHistory shows that higher taxes are compatible with economic growth and job creation: both grew more strongly following the Clinton income tax increases on the highest-income households than after the Bush tax cuts.

The Clinton-era tax rates and revenues enabled budget deficits to fall, increasing national saving and reducing the long-term costs of borrowing, and this may have enabled the private sector to increase investment in ways that improved growth.  Similarly, the Congressional Budget Office finds that letting the Bush tax cuts expire on schedule would strengthen long-term economic growth, if policymakers use the revenue to reduce deficits.

That’s critical: how the government uses the revenue generated by tax increases largely determines how the tax hikes affect growth. Cuts or increases to tax rates do affect behavior, Urban-Brookings Tax Policy Center co-Director William Gale told journalists during a conference call last week.  “[B]ut they also have effects on the deficits, and those deficits’ impact on growth can be far larger than the incentive effects that are created.” (You can listen to the call here.)  What’s more, the revenue from tax increases can fund — or prevent cuts to — investments in areas that support economic growth, such as infrastructure and education.

Tomorrow, in the final installment of this series, we’ll look at how policymakers might consider raising taxes at the top.

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More About Chye-Ching Huang

Chye-Ching Huang

Chye-Ching Huang is a tax policy analyst with the Center’s Federal Fiscal Policy Team, where she focuses on the fiscal and economic effects of federal tax policy. You can follow her on Twitter @dashching.

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2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. William Odatruf #

    Sorry, Ms Huang, this is nonsense.

    You can’t assert one one hand (in your third paragraph) that if new taxes are used to reduce the deficit – that is, not spend them – that this will strengthen long-term economic growth and then go on to assert (in your fourth paragraph) that “the revenue from tax increases can fund — or prevent cuts to — investments in areas that support economic growth, such as infrastructure and education.”

    The two are mutually exclusive.

  2. Craig Ritchie #

    Sorry, but your article lacks any logic or accountability. Economic growth and restrained spending, rather than Clinton tax rates, created the revenue that created a budget surplus. The first two years of Clinton’s first term were a disaster. The 1994 elections took the threat of higher healthcare costs (Hillary Care)and higher taxes off of the table. At that point, economic growth started to happen. In 1996, Clinton correctly reduced capital gains taxes that unlocked capital that was tied up in mature businesses. At that point, companies like AOL, Cisco, Microsoft, and Intel attracted more capital, expanded operations, and hired more workers. Finally, after the 1997 Asian economic crisis, both interest rates, and energy costs came down dramatically, reducing our cost of distribution and housing. Oil dropped to $12 per barrel, and gasoline came down below $1. Companies threatened by year 2K concerns bought equipment, driving growth. Today, we are just beginning to implement a national healthcare plan that will raise our structural costs. At the same time we are going to raise the cost of capital by raising rates on capital gains and dividends. We are reducing after tax cash flow through higher personal income tax rates. We are raising the cost of energy through regulations. All of these anti-business, anti-capital policies are going to raise our costs, and therefore, the risk, of doing business in the U.S. Since you are an analyst, make your own conclusion.

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