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