Like most of America, Michigan’s chief economic growth strategy for at least two decades has been cutting taxes. As you know, our research has indicated that what a state and its local governments tax and how much has little or no predictive value in explaining whether a state or its regions are prosperous or not. In fact, higher tax states and regions tend to be more prosperous.
Tax cuts, particularly for upper income Americans, have been the centerpiece of the nation’s economic growth strategy since the Bush tax cuts.The non partisan Congressional Research Service has just published a study on what effect the top marginal tax rate and capital gains (and now dividends) tax rate has on the American economy. Basically they find that lower top marginal tax rates or lower investment earnings tax rates do not lead to a stronger economy. What it does do is increase income inequality.
The report looks at the effect of top tax rates from 1945-2010 in five areas: economic growth, savings, investment, productivity and income inequality. As they write: “Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie). Proponents of higher tax rates argue that higher tax revenues are necessary for debt reduction, that tax rates on the rich are too low (i.e., they violate the Buffett rule), and that higher tax rates on the rich would moderate increasing income inequality (change how the economic pie is distributed).”
The report also provides the history of the top and capital gains tax rates. “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 average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.”
So what has this decades long tax cutting on the incomes of the most affluent Americans yielded? The report concludes: