Do tax cuts actually stimulate the economy?

DrB-

Standard line for Romney this campaign season, is that he’ll create jobs via some mystery process. He hasn’t outlined it just yet, or ever, but in short it involves lots of tax cuts. Presumably, this will create jobs.  But….does it?

Lucky for us, there’s a new study out by the Congressional Research Service.

In 1990, President George H. W. Bush raised taxes, and GDP growth increased over the next five years. In 1993, President Bill Clinton raised the top marginal tax rate, and GDP growth increased over the next five years. In 2001 and 2003, President Bush cut taxes, and we faced a disappointing expansion followed by a Great Recession.

 

So, taxes went up some, economy still did fine. Then under the next guy, taxes went up some, economy still did fine. Then the next guy cut taxes, and everything went to hell. Correlation?

I prefer graphs about pirates v global warming, but this is good too.

No, actually.

Analysis of six decades of data found that top tax rates “have had little association with saving, investment, or productivity growth.” However, the study found that reductions of capital gains taxes and top marginal rate taxes have led to greater income inequality. Past studies cited in the report have suggested that a broad-based tax rate reduction can have “a small to modest, positive effect on economic growth” or “no effect on economic growth.”

The only conclusion from six decades of economic data is that tax cuts don’t seem to have any effect at all on economic growth. They do, however, have a significant effect on income inequality.

The paper is a good reminder to be humble about taxes as a tool for growing the economy. They remain, above all, a tool for collecting revenue and tweaking incentives for specific economic behavior. Congress has cut tax rates repeatedly over the last 60 years, while the country and the global economy have undergone considerable changes that probably had a greater effect on growth.

 

Simply put, when a politician proudly declares that he’s  going to fix all our ills by cutting taxes, he’s literally just making things up. There’s no data to support the hypothesis that tax cuts lead to economic growth.

 

Atlantic article: http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/

PDF of congressional report: http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf

 

 


 

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