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

 

 


 

You can find me on twitter, @DrDavidBurger

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  • invivoMark

    In the interests of academic honesty, I gotta call you out on this. Your closting statement, “There’s no data to support the hypothesis that tax cuts lead to economic growth,” is wrong. There certainly are data that support that hypothesis. This is, after all, not the only economic study ever done. I’m sure I could find references for you, though I think you’d do just as well finding them yourself.

    The data is inconsistent, however, and there’s no reason to assume that any specific tax break, either across-the-board or for the “job providers” (rich folks), will automatically improve the economy in any meaningful way. Perhaps a better statement would be along the lines of: tax breaks infrequently stimulate an economy.

  • Armored Scrum Object

    My fuzzily-recalled understanding is that tax cuts do stimulate the economy, but at a rate that’s still overwhelmingly a net loss of tax revenue (i.e. it represents a sort of minor discount on the cost of the cut, on the order of 10% IIRC), and a worse investment from a macroeconomic standpoint than even the classic “socialist” canard of paying workers to dig ditches and then fill them in again (because those workers will probably at least spend most of their money on food, clothing, housing, and booze rather than stuffing it into Treasuries). The best investment, as might be guessed, is infrastructure spending that employs people in the short term and reduces the cost of doing business in the long term (highways, utilities, etc.). This has actually been studied, but I don’t recall the sources or the exact numbers that I’ve read.

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