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Stangler writes: "Tax cuts do, in fact, boost employment and investment, just not when they're directed at the rich."

Internal Revenue Service building. (photo: Jim Watson/AFP)
Internal Revenue Service building. (photo: Jim Watson/AFP)

Tax Cuts for the Poor and Middle Class - Not the Rich - Create Jobs, Research Shows

By Cole Stangler, International Business Times

23 April 15


he exact link between tax cuts and job growth has for years been a matter of fiery debate, from college economics departments to the chambers of Congress. Now, a working paper from the National Bureau of Economic Research could add some nuance to the dispute: Tax cuts do, in fact, boost employment and investment, just not when they’re directed at the rich.

The study from Owen Zidar, a professor at the University of Chicago Booth School of Business, found that tax cuts aimed at the top 10 percent of earners produce little stimulative effect on the overall economy. On the other hand, those aimed at the bottom 90 percent have a greater impact.

Zidar examined the short- to medium-term impact of tax changes at the state and federal levels going back to 1948. On the national level, he found a 1 percent gross domestic product (GDP) tax cut aimed at the bottom 90 percent translates to job growth of 2 to 5 percent, but the impact of a similar cut on the top 10 percent of earners has a negligible effect. He reached similar conclusions on the state level: Tax decreases for most of the population generated 5 percent employment growth, but yielded little change when applied to the top income bracket.

Tax hikes produce similar effects, the paper says. When applied to the rich, they’re insignificant. But when applied to the rest of the population, they have a negative effect on economic activity.

Zidar contends that his is the first paper to quantify the economic impact of tax cuts on different income levels -- something he acknowledges is “a very hard problem to tackle” because of a relative lack of data points. But he overcomes that challenge, in part, he says, by looking more closely at the regional impact of tax shocks. In other words, Connecticut, with its high proportion of top income earners, responds differently to tax cuts than Mississippi.

Zidar says the paper carries policy implications, too. If lawmakers want to stimulate job growth, “this suggests payroll tax reform could be a pretty powerful tool,” he says. Scrapping those taxes up to a certain amount would be a far more effective means of creating jobs than say, slashing income taxes on the top 1 percent.

The paper is also an academic rebuttal of sorts to former Republican presidential candidate Mitt Romney’s infamous slam of the 47 percent “who pay no income tax.” More tax breaks for the masses are actually a good thing, Zidar’s research suggests.  

Likewise, the paper suggests expanding programs like the Earned Income Tax Credit -- which applies largely to working class families -- would be healthy for the overall economy. your social media marketing partner


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0 # PaineRad 2015-04-23 10:35
Unfortunately, those tax cuts are frequently followed either by pay cuts or pay stagnation such that their take home pay is little different over time.

And pray tell how tax cuts helps the unemployed with nothing to tax?

Yes, it is better than giving them to the 1%, but that is like saying that a penny is better than nothing. Tax cuts are minimally effective. It is long past time to quit using right-wing talking points. It is long past time to propose serious, bold and constructive policies. And tax cuts don't qualify.

It would be far, far better to take the same dollar amount to hire people to rebuild crumbling infrastructure, put decentralized solar on rooftops all across the country and spend a little time renegotiating NAFTA and CAFTA to rebuild our crumbling manufacturing base.
+8 # tedrey 2015-04-23 10:40
Research is always valuable, but doesn't everybody already know this except those who profit by not knowing it? ( And their dupes.)
+10 # MJnevetS 2015-04-23 11:00
PaineRad, according to the article, the study also viewed tax increases. By increasing tax on the top 10%, it would have a negligible negative impact on the economy. BUT, it would have a major positive effect. (Assuming the additional funds were properly directed, which is a big assumption!) The government could then invest in our nation's infrastructure. Improve roads, bridges, etc. This would in turn create both skilled and non skilled jobs (addressing your concern). The additional money could be used to shore up our safety net (social security, VA benefits, health-care, etc.). Unfortunately, I don't believe that it is ignorance, nor a lack of understanding regarding economics which has led us to our current situation. Instead it is ideologues who pay to elect similar thinkers, or paid lackeys, who pass harmful economic policy, with complete awareness of its toxicity to our democracy (assuming we even still have one)!
0 # commercecomet 2015-04-23 12:22
The principal conclusion here is valid--that the recent spate of federal and state income tax cuts aimed at the well-to-do--rep resent a very poor economic policy choice. The study on which this conclusion is based, however, appears to have made one large mistaken assumption: that it has been the tax cuts--in and of themselves--tha t have generated the results in question. A more complete view of the relevant economic history, combined with a firmer grasp of economic theory, would suggest, instead, that on the federal level the critical impact is drawn not from the tax cuts, per se, but from the deficit spending such cuts have made possible (both mechanically and politically). This is why the study--albeit somewhat less clearly--has also drawn a separate, and somewhat less equivocal conclusion regarding tax increases. Because almost all broadly structured tax increases, in the absence of Greek-style evasion,boost economic activity by moving money into a place where it's more likely to be spent (and multiplied significantly by the middle class civil servants and contractors it's spent on), where it's done with a progressive structure, the impact on economic activity is all the greater. What deficits do is to simply amplify the existing fiscal effect, however weak or strong it might be. This is also why deficits (as a percentage of output) are always smaller in regimes with a more progressive tax structure. Increased activity both shrinks them and makes them less necessary.
+2 # Diane_Wilkinson_Trefethen_aka_tref 2015-04-23 13:31
"It would be far, far better to take the same dollar amount to hire people to rebuild crumbling infrastructure. .." etc.

Yes it would but first, where will that dollar come from? I don't think that deficits are evil, per se, but I do recognize that even the government can print only so much money before it's currency becomes so devalued that a loaf of bread costs $hundreds (think Argentina in the middle 1900s).

So to me, the really interesting point is, "Tax hikes produce similar effects, the paper says. When applied to the rich, they’re insignificant. But when applied to the rest of the population, they have a negative effect on economic activity."

Although you can't cut taxes for those who already don't pay any, you can always raise the rates for those whose lifestyles won't feel any effect from paying more taxes.

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