The 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.