Congressional Research Service Really Got It Wrong on Taxes

This Thursday, the House Ways and Means Committee will hold a rare closed-door meeting to discuss the tax provisions that are set to expire at the end of the year.  What’s in the balance?  Income tax rates, unemployment benefits and the payroll tax holiday.

Politico reports that of late, the committee has been on a bipartisan kick.  Also on the agenda for the Ways and Means Committee and the Democratic-led Senate Finance Committee is a discussion about capital gains taxes.  As lawmakers approach this important issue, they should bear in mind that the Congressional Research Service was flat out wrong when it implied that lower tax rates don’t strengthen the economy. 

Heritage’s Lachlan Markay explains:

“The CRS is supposed to provide expert, objective, non-partisan research analysis to Congress. Most of the time, the CRS performs this function admirably and diligently; the longstanding episodic exception has been in tax policy. The most recent example of this partisan divergence is a report setting out to do the impossible: use historical data to argue that lower rates do not encourage stronger economic growth and, by implication, that higher marginal tax rates such as those espoused by President Obama do not discourage economic growth.”

This simplistic analysis does not isolate lower tax rates as the single factor effecting economic growth.  It ignores other economic and policy factors that affect the economy as well.  The essential problem is that no two time periods are the same.  Markay continues:

“Comparing 1950 to 2010 just on tax rates is ludicrous. The world and tax policy are entirely different in those timeframes. If CRS tried to account for all the differences, and then determine how tax rates influenced growth, it would find a different and more accurate answer: that lower rates encourage growth.”

Moreover, as Heritage’s Curtis Dubay has warned:

“It is imperative that Congress act as soon as possible to stop Taxmageddon, because the effect it would have on the economy would be devastating. The economy is already at stall speed. An unprecedented tax increase the size of Taxmageddon would drive it further into the doldrums. In fact, the Congressional Budget Office estimates that, unless stopped by Congress, Taxmageddon will push the economy into a new recession.[4]… The list of prominent economists, market shapers, and well-respected foundations and institutions calling on Congress to stop Taxmageddon to avoid an economic catastrophe and relieve the economy of the uncertainty plaguing it now is long and growing.[5] It is long past time for Congress to listen to them.”

So while the CRS usually provides credible information, in the case of their tax analysis, they are painfully wrong.   It would be a rueful error to act on this faulty advice, and American jobseekers and taxpayers would suffer for it.

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