Importantly, they find that changes in income following a tax change are responsive to the marginal rate change regardless of the change in the average tax rate. This illustrates that the positive GDP changes the authors find are the response to changes in the incentives, rather than due to an increase aggregate demand through the consumption channel. Cuts in tax rates for the top 1 percent also have positive impacts on other income groups, consistent with a supply-side narrative of how reductions in top marginal rates can increase incomes for other groups over time.
However, tax cuts for the top 1 percent do increase inequality. Zidar examines the impact of federal tax burdens on economic growth and labor supply across different income groups and states from He finds positive impacts of tax cuts on economic growth following two years after the change in policy but finds that tax cuts for low- and moderate-income taxpayers affect growth more than tax cuts for high-income taxpayers. The paper finds that a 1 percent of state GDP tax decrease for the bottom 90 percent of earners increases state GDP by 6.
Looking at labor supply effects in particular, he finds that a 1 percent of state GDP tax decrease increases labor force participation for the bottom 90 percent of earners by 3.
He does not find any significant impact on labor force participation rates, hours worked, or GDP growth for the top 10 percent of earners from a similarly sized tax change, somewhat in contrast to the results found in Mertens and Olea for top earners. However, the paper finds strong effects of tax cuts on real wages as well.
However, this paper only looks at short-run impacts of tax changes on GDP and does not consider the broader implication of tax policy on long-run growth, human capital, or innovation. Nonetheless, the paper provides compelling evidence of tax cuts impacting growth through the supply side, consistent with neoclassical economic theory. Ljungvist and Smolyansky look at state corporate tax changes from to assess their impact on employment and income.
By comparing nearby counties across states, this allows the authors to isolate the impacts of corporate tax changes relative to other policies that might affect economic growth.
They find that a 1 percentage-point cut in statutory corporate tax rates leads to a 0. They find that tax increases are almost uniformly harmful, while tax cuts seem to have their strongest positive impact during recessionary environments. As with some of the other studies discussed here, the paper mainly examines short-runs effects, and it is possible that these positive effects could grow over a longer time horizon.
Gunter et al. They find that the effect of taxes on growth are highly non-linear: At low rates with small changes, the effects are essentially zero, but the economic damage grows with a higher initial tax rate and larger rate changes. These non-linearities imply strong Laffer curve effects: At certain tax rates, further increases beyond that point will actually reduce federal tax revenues.
For European industrialized countries, the authors estimate a tax multiplier of Nguyen et al. They find that income tax cuts, defined in their paper as an aggregate of individual and corporate income, have large effects on GDP, private consumption, and investment. A percentage-point cut in the average income tax rate raises GDP by 0. The effects of consumption tax cuts are comparatively smaller and did not produce statistically significant effects, but the paper finds that switching from an income to a consumption tax base has positive effects on growth.
Consumption taxes are generally viewed as less distortionary than other forms of taxation, as they do not significantly impact incentives to work and invest that are essential for ensuring long-run economic growth. Cloyne et al. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.
Measure content performance. Develop and improve products. List of Partners vendors. There has never been agreement about what should be done to solve the ballooning U. On one side are those who believe higher tax rates are required to bring in desperately needed revenue. On the other side are those who believe that raising taxes is a bad idea, especially during a recession, and that lower tax rates increase revenues by stimulating the economy. To gain some historical perspective, here's a look at some of the key tax policies that have made headlines over the past three decades.
When he ran for president in , Ronald Reagan blamed the nation's economic ills on big government and oppressive taxes. It was known as " supply-side " or " trickle-down " economics, but the media dubbed it " Reaganomics.
The theory was that upper-income taxpayers would then spend more and invest in businesses, driving economic expansion and job growth. Reagan also believed that, over time, lower rates would translate into higher revenue because more jobs mean more taxpayers. He essentially put into practice the economic theories of Arthur Laffer, who summarized the hypothesis in a graph known as the " Laffer Curve. Initially, inflation was reignited and the Federal Reserve hiked interest rates.
This caused a recession that lasted for about two years. But once inflation was brought under control, the economy began to grow rapidly and Reagan wanted to offset increased defense spending with reductions to entitlement programs, but that never happened. President Bill Clinton's tax policies provided insight into the impact of both tax increases and decreases.
The Omnibus Budget Reconciliation Act was passed in and it included a series of tax increases. During Clinton's presidency, the economy added approximately When the Newt Gingrich-led Republicans wrested control of the House of Representatives in , they ran on a platform known as the Contract with America. The provisions included commitments to reduce taxes, shrink the federal government, and reform the welfare system. By , unemployment had dropped to 5.
Clinton resisted the bill at first but ultimately signed it. While some economists believe that the tax cuts were better medicine for the economy, the second term for the Clinton administration had the benefit of the technology boom that produced the computer and Internet revolutions. Many of the high-tech jobs created by that boom were lost when the Nasdaq cratered after Clinton left office, bottoming out in Oct.
One interesting data point is the relative stability of tax revenue as a percentage of GDP, regardless of the existing tax policies over time. The authors analyze counties that border one another but are in different states and find that counties in states with higher corporate tax rates have less employment and lower wage income.
They also find that during recessions corporate tax rate cuts boost economic activity. Given that the economy is coming out of a pandemic-induced downturn , a corporate tax cut seems like a better way to help workers than the tax increase President Biden is proposing.
There is also evidence from states that the best scientists move away in response to higher corporate taxes.
It is easier to leave one U. But it is not impossible to leave the United States, and there are plenty of examples of people fleeing high-tax countries for lower-tax ones.
Losing star scientists and inventors will reduce U. Finally, there are several studies that find higher corporate tax rates directly reduce investment and innovation. One study from finds that higher state corporate income taxes result in less foreign direct investment. Investment is an important driver of economic growth, so less investment, all else equal, means less growth. Another study from finds that an increase in state corporate taxes reduces future innovation.
The authors note that their results are consistent with models that show that higher taxes reduce the incentive to innovate and discourage risk-taking. These results are consistent with other studies. One study from finds that large corporate income tax cuts increase corporate innovation, especially among financially constrained firms.
Another study from looks at data from Portugal and finds that a lower corporate tax rate increased firm entry and job creation and that the firms that responded to the tax cut tended to be larger, more productive, and more likely to survive after three years.
There is strong evidence that corporate tax increases cause worse economic outcomes at the state level. At a time when unemployment claims remain high and thousands of firms are still in survival mode, it seems imprudent to raise corporate taxes at the federal or state level.
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