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Friday, October 19, 2012

Do Tax Cuts Stimulate the Economy?

Laura Tyson and Owen Zidar report on some recent research showing that tax cuts for high income households do little to stimulate economic activity, but tax cuts to lower income households are a different story -- they appear to be effective at stimulating both consumption and investment:

Tax Cuts for Job Creators, by Laura D’Andrea Tyson and Owen Zidar, Commentary, NY Times: The centerpiece of Mitt Romney’s tax plan is an across-the-board 20 percent cut in marginal tax rates. ... His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment... This assertion ... is not supported by the evidence.

If tax cuts for high-income earners generate substantial real economic activity and job creation, then we should expect to see two things in the data. First, employment growth should be stronger in the years after tax cuts for these earners. Second, parts of the country with a larger share of high-income earners should experience stronger employment growth after national tax cuts for these taxpayers, because the places where they live receive a larger share of the national tax cuts.
What do we actually see after combing through a half-century of economic data? Neither of these predictions is borne out. ...[presents evidence, along with supporting graphs]..., we have found no evidence that such cuts lead to substantially faster employment growth at the national, state or even ZIP-code level.
Tax cuts for everyone else are a much more effective path to job creation. Our research found a statistically significant and positive relationship between tax cuts for the bottom 95 percent and job growth at both the national and state levels. ... Lower-income taxpayers spend a higher share of their tax cuts. ... Investment also increases after tax cuts for the bottom 95 percent...
Over all, our research shows that tax cuts for the bottom 95 percent are much more effective than tax cuts for the top 5 percent at increasing job creation in the subsequent two years. Other analysts reach similar conclusions. ... [summarizes other evidence] ...
[I]f the priority is to create a substantial number of jobs over the next presidential term, evidence from the last half-century strongly suggests that tax cuts for the top 5 percent won’t work. Tax cuts for working families, tax cuts directly aimed at expanded hiring or increases in infrastructure investment would have much more bang for the buck and would cost much less in terms of forgone revenue and deficit reduction...
[Still under the weather, so I'll take the easy route and link to an old post of mine on tax cuts and (lack of) subsequent economic growth.]

    Posted by on Friday, October 19, 2012 at 10:04 AM in Economics, Taxes | Permalink  Comments (84)

          


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