Recent Congressional Research Service Study Provides Inaccurate Information to Congress

January 28, 2013

As one of the organizations responsible for educating Congress on different issues, the Congressional Research Service (CRS) must provide accurate research that reflects the best information and scholarship available.  A recent study released by the CRS fails to fulfill this purpose, says Stephen Entin, a senior fellow at the Tax Foundation.

The study in question was released previously but later recalled for inaccuracies.

  • The CRS examined the effect of the top statutory tax rates on economic activity and might have influenced the recent discussions on taxing the wealthy and the fiscal cliff.
  • The study attempts to determine the link between the top marginal tax rate on capital gains and the growth rate of the economy.
  • It seeks to determine only the temporal relationship and fails to account for how taxes actually work in affecting the economy.
  • It also fails to consider the effect of other taxes taking place at the same time as the tax on capital gains.

Many other factors not considered in the study can hide or exaggerate the effect of tax rate changes. If everything is held equal when the tax rate is lowered, domestic output should increase. Typically, everything is not held equal. For example, in 1986, when the Tax Reform Act passed, the maximum capital gains tax rate rose from 20 percent to 28 percent while the dividend tax rate lowered from 50 percent to 28 percent, the investment tax credit was eliminated and the corporate tax rate was reduced from 46 percent to 34 percent.  During this period, it is hard to single out one single policy change from the end result.

  • Changes in tax policy affect the "service price," the rate of return on capital needed to cover the cost of the asset, pay any taxes, and leave an investor with enough income after taxes to justify the investment.
  • Lower service prices incentivize individuals to invest and create more capital while lower marginal tax rates also incentivize employment and entrepreneurship.
  • Instead of looking at the short-term benefits of tax rate changes, one should examine the long-term changes in capital stock and total output.

The CRS fails to hold every variable steady in their study. It also fails to examine the change in service price and wholly looks at the wrong factors in painting a picture of how the top marginal tax rates on capital gains affect overall economic activity.

Source: Stephen Entin, "CRS Study on Tax Rates and Growth Still Flunks the Test," Tax Foundation, January 8, 2013.

 

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