Friday, February 24, 2017

Tax cuts do not lead to economic growth, only more income inequality

Like most conservatives, Donald Trump is relying on tax cuts to prime the economy and economic growth. Canadian Conservative Party leadership hopeful Maxine Bernier (as well as most of his competitors) is likewise sold on the effectiveness of tax-cuts and trickle-down economics. It has been a mainstay of conservative laissez-faire ideology for decades, and many economic models (like those of the US's voguish Tax Foundation, for example) just ASSUME the relationship.
But does it actually work? The short answer is that the jury is still out, but the evidence is, if anything, more on the side of "no" than "yes".
A 2012 survey of top economists by the University of Chicago's Booth School of Business found that 35% were convinced that, in general terms, tax cuts stimulated the economy - perhaps less than you might have imagined. A further 35% were undecided, while 8% were somewhat or very sure they did not. More specifically, a whopping 71% either disagreed or strongly disagreed that tax cuts would lead to higher revenue in the next five years, while a telling 0% were willing to state that cutting taxes would in fact raise revenue over the next five years.
Another 2012 report, this time from the non-partisan Congressional Research Service, concluded that, over the last 60 years, there has been absolutely no correlation between the top marginal tax rate and economic growth. In the 1990s in the USA, for example, both Bill Clinton and George Bush Sr. raised taxes, and the economy boomed, with incomes growing faster than at any time since the 1960s. George Bush Jr.'s subsequent tax cuts, on the other hand, led to the worst economic downturn since the Depression, as well as substantially increasing the deficit.
Of course, the economic effects of tax cuts depend on the kind of tax cut being applied. For example, a cut to the taxation of low income workers is likely to have more effect on the economy, because poorer people are more likely to go out and spend that extra $100 than a millionaire who already has more than enough discretionary income. Also, when tax rates are already relatively low, as they have been in recent decades, tax cuts tend to have a much more limited effect on people's behaviour and on the economy. A Moody's study from 2008 suggests that one-off or short-term tax cuts like rebates tend to have more economic effect than more long-term cuts (the study also noted that boosting spending on programs like feed stamps and employment measures has a substantially greater effect).
So, in general terms, the link between tax cuts and economic growth is far from proven, despite the heavy reliance on just such a link by most conservative politicians. And, as a Business Insider article shows, not only do tax cuts not spur economic growth, they also have the additional undesirable effect of increasing inequality: the lower the top marginal rate of tax, the higher the proportion of national income that goes to the top 0.1% (and vice versa).
It all seems pretty clear to me.

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