Tax history...

How past income tax rate cuts on the wealthy affected the economy

Under the GOP’s recently released framework, the top income tax rate would return to George W. Bush-era levels. The GOP has historically claimed reducing the top tax rate will create economic growth, but that hasn’t always happened.

By TYLER FISHER

After months of speculation, President Donald Trump and GOP leadership released their “Unified Framework For Fixing Our Broken Tax Code” on Wednesday. In addition to cutting the corporate tax rate and ending various deductions and loopholes, the plan significantly changes the individual income tax rate structure.

The plan would reduce the number of income brackets from seven to three: 12%, 25% and 35%, but keeps open an option for an additional tax rate bracket for the richest Americans. This is coupled with nearly doubling the standard deduction to $12,000 for individuals and $24,000 for joint filers. The GOP did not release the endpoints for where the three income brackets would fall.

Currently, the highest income earners pay a 39.6 percent marginal tax rate. Under the GOP plan, they would pay 35 percent. In addition, the plan would repeal the alternative minimum tax and the estate tax, another cut that would aid the wealthy.

According to the released plan, “an additional top rate may apply to the highest-income earners to ensure that the reformed tax code … does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

However, as the plan stands now, the highest-income earners would see their top tax rate return to the levels that followed President George W. Bush’s tax cuts. Since Bill Clinton’s administration, the highest income tax bracket has hovered around 35 percent to 40 percent.

Before Ronald Reagan’s presidency, those who fell into the highest tax bracket paid over half of their income in income tax. Just after World War II and into the 1950s, the rate was over 90 percent.

A history of taxing the rich

Like much of the industrialized world, the United States did not begin imposing income tax on the wealthy until the 1910s. Since its introduction, the tax rate has varied wildly.

When tax cuts are given to the wealthy, lawmakers often justify the cut by claiming it will spur economic growth. The Tax Foundation, a nonpartisan, conservative-leaning think tank, argued in its analysis of Trump’s 2016 campaign proposal that lowering the top income tax rate would lead to increased job opportunities.

This core tenet of supply-side economics guided Reagan and Bush during consideration of their proposed tax cuts. Still, it's unclear whether cutting the income tax on the wealthy boosts economic growth.

Take, for example, the Reagan administration’s full embrace of the theory, which coincided with economic growth in the mid-1980s. Many supply-siders use this example to advocate for cutting tax rates further.

On the other hand, Bush’s administration proposed and Congress enacted a set of supply-side-focused tax cuts in 2001 and 2003 that some blamed for the Great Recession.

The Congressional Research Service published a paper in 2012 that found no correlation between top tax rates and economic growth. Congressional Republicans protested the findings, and the service briefly withdrew the paper.

Republicans argued that the CRS paper had methodological errors, namely that it didn't account for the long-term benefits of tax rate cuts. The paper looked only at effects on growth within the first year of the cuts.

POLITICO looked at each time the country changed the top income tax rate and the following five years of GDP per capita growth rate. The results are similar to the CRS findings: changing the top income tax rate does not have a predictable effect on economic growth.

The unpredictable effect of changing income tax rates on the wealthy

Since World War II, the tax rate has changed significantly six times. The effects on the economy were different each time: the tax rate on high income earners has no relationship to economic growth.

1963-65 Kennedy and Johnson significantly reduce top tax rate for first time since World War II

Change in top income tax rate -21.0%

In an attempt to grow the economy and appeal to the center before his upcoming 1964 election campaign, President John F. Kennedy proposed cutting taxes across all incomes. Following Kennedy’s assassination, President Lyndon B. Johnson and his Democratic Congress enacted the Revenue Act of 1964, which included bringing the marginal rate for top earners to 70%.

1981-82 Reagan’s first tax cut comes during recession before partial rollback, economic boom

Change in top income tax rate -20.0%

From 1978 through 1982, the economy experienced a recession that had two low points. The second dip came in 1982, when President Ronald Reagan and a GOP Congress passed a slew of tax cuts, including cutting the top tax rate from 70% to 50%. The next year, Congress rolled back other tax cuts, but the top income tax rate remained the same. In 1984, the economy’s growth rate was the best since at least 1961.

1986-88 Reagan’s second tax rate cut precedes recession in early 1990s

Change in top income tax rate -22.0%

During his second term, Reagan presided over another major tax rate cut as part of a more general tax reform act. The package cut the top tax rate to its lowest point in the postwar era at 28%. During the subsequent five years, the economy experienced a small recession during George H. W. Bush’s presidency.

1992-93 Clinton raises taxes before ’90s steady growth

Change in top income tax rate +8.6%

While President George H. W. Bush rolled back some of Reagan’s tax cuts, slightly raising the rate for top income earners, President Bill Clinton introduced the first major increase to the top marginal tax rate since the 1950s, up to 39.6%. The economy posted slightly above average growth for the ensuing five years.

2001-03 George W. Bush cuts taxes as economy begins to falter

Change in top income tax rate -4.6%

President George W. Bush cut taxes in two packages, one in 2001 and in 2003. On aggregate, they cut the top tax rate to 35%. Because Congress passed this package through budget reconciliation, the tax rate cuts were set to expire in 10 years. Shortly after the full tax rate cuts went into effect, the economy began to decline, albeit slowly, before crashing in 2008.

2012-13 Obama raises taxes on wealthy while economy climbs slowly out of the Great Recession

Change in top income tax rate +4.6%

President Barack Obama and a Democratic Congress extended the Bush tax cuts in 2010 when they were set to expire, but only for two years. In 2012, with a new GOP Congress, the government reached a deal to let most of the tax cuts remain, except for the top marginal rate, which returned to 39.6% from the Clinton era. The economy, still sputtering from the Great Recession, continued to post below-average growth.