Unstructured Finance

Which tax cuts stimulate the economy?

By David Cay Johnston
September 12, 2012

A statue of company founder Henry Ford overlooks part of the historic Rouge Plant complex in Dearborn, Michigan. REUTERS/Gary Cameron

Tax cuts are the key to job creation, or so Mitt Romney, running mate Paul Ryan and the 2012 Republican platform all say. But what does the empirical evidence show? Is the rhetoric in line with the known facts?

Studies examining the impact of cutting personal income tax rates on job growth or economic activity generally have been inconclusive, said Will McBride, chief economist for the Tax Foundation.

Owen M. Zidar, a graduate economics student at the University of California at Berkeley, and a former staff economist on the White House Council of Economic Advisers for President Obama, has taken another crack at it, sifting through the data, using the National Bureau of Economic Research’s tax simulation model. Zidar looked at state level income and economic data.

He reasoned that “if tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners.” The data show that tax cuts at the top, though, do not result in faster growth in states with more high-earners.

“Almost all of the stimulative effect of tax cuts,” Zidar found, “results from tax cuts for the bottom 90 percent. A one percent of GDP tax cut for the bottom 90 percent results in 2.7 percentage points of GDP growth over a two-year period. The corresponding estimate for the top 10 percent is 0.13 percentage points and is insignificant statistically.”

Asked about the new research, Romney campaign spokeswoman Andrea Saul urged against publishing a story about Zidar’s work because it is preliminary and because of Zidar’s connection to the Obama Administration. Zidar has also worked for an arm of Bain Capital, the firm Romney founded.

That fits with the argument made over the last century by a variety of business leaders — carmaker Henry Ford and retailer Edward Filene among them — that the path to economic growth lies in workers making enough (and having enough after taxes) to buy goods and services.

Readers may view Zidar’s paper online at SSRN after signing up for a free account.

Comments
7 comments so far | RSS Comments RSS

Are there any data-driven studies that conclude tax breaks for the wealthy stimulate economic growth?

Posted by rcd3437 | Report as abusive
 

We would welcome reader input on this question. In reporting for this post we were not able to find one.

Posted by Nanette Byrnes | Report as abusive
 

This questions if unfairly stated… you can’t lower taxes without decreasing spending…which is the platform of Romney. I am an independent and I am getting extremely tired of the bias reporting. We give money to countries that burn our Embassy’s and kill our people. We educate illegals, continue to increase salaries to or Washington officials and allow them to have a completely different healthcare provider than the one being shoved down our throat… I could go one but I am typing to myself … this will never be posted… to bias …right
But… as you read this please remember it when you are 10 years older and look back …saying “WTF was I thinking when I voted for that man again?”

Posted by RNBSNMBA | Report as abusive
 

It’s very simple. Who is your consumer? Is it rich people, is it middle class people, is it poor people. Manufacturing goods are made in such volume that almost no amount of salary increases will create new jobs. What’s left? The service economy. Thanks to the internet, people can Google and DIY their way out of almost any service. Even portfolio managers are becoming obsolete.

What’s the point? The free market isn’t working because 1) regular Joe can’t obtain enough savings and credit to start their own business because Fortune 100 companies don’t account for the majority of employment 2) values of goods and services are depressed because people can’t pay what they really value for something furthering diminishing the size of the available market; this exacerbates the first thing.

If you put 10% of the capital that public and private investors aren’t doing anything with and put into the supply chain of consumption, the economy would be 20% better than it is right now because goods and services would have value again

Posted by dmullin1240 | Report as abusive
 
 

I recommend the link above to a piece by Will McBride. In it he responds to this post and highlights research on the topic of graduated tax codes and corporate income taxes. We focused more narrowly in our post on the impact of an income tax cut. Here is a copy of the link to Mr. McBride’s post as well: http://taxfoundation.org/blog/journalist s-too-quick-conclude-there-no-tradeoff-b etween-taxes-and-growth

Posted by Nanette | Report as abusive
 

To be clear, McBride mentions research on corporate tax rates and says his statistical analysis on OECD countries – meaning not on just the USA – shows a link between growth and corporate tax rates. That is not what this paper is about. It is about individual taxes. The best he can do is wonder at the end how many data points are involved in the study which is actually at issue. (The answer, btw, is a lot; it’s not just the number of tax changes classified as exogenous but that the data gets to the state level and thus is broad.)

And to be clear, this William McBride of the Tax Foundation is not the same as Bill McBride of Calculated Risk. Don’t mean a put down in that. It’s easy to confuse two people with the same name.

Posted by jomiku | Report as abusive
 

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