Tax cuts for the rich don't boost the economy. Tax cuts for the poor might.

Tax cuts for the bottom 90 percent of US earners tend to result in more output, employment, consumption, and investment growth than equivalently sized tax cuts for the top 10 percent, according to a new paper. 

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    A statue of former Treasury Secretary Albert Gallatin stands outside the Treasury Building in Washington.Tax cuts for low- and moderate-income households can boost economic growth, according to a new paper from the NBER.
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It turns out that tax cuts for the job creators...don’t create very many jobs. By contrast, tax cuts for low- and moderate-income households can boost economic growth.

Those are the results of an interesting new working paper by Owen Zidar for the National Bureau of Economic Research. Zidar, an assistant economics professor at the University of Chicago’s Booth School of Business, concludes that tax changes aimed at low- and moderate-income households have far more powerful macro economic effects than revisions that target the highest-income 10 percent.

“Overall, tax cuts for the bottom 90% tend to result in more output, employment, consumption, and investment growth than equivalently sized tax cuts for the top 10% over a business cycle frequency.”

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Zidar analyzed the two-year effects of tax changes in the US since 1948 at both state and national levels. He used NBER’s TAXSIM model to calculate the effects of new tax law after 1960, the earliest data available for the model. He looked at the impact of tax changes for the highest income 10 percent, the top half, the bottom 90 percent, and the bottom half. And he corrected for non-tax policies, such as changes in spending.

His results were striking at both the national and state levels. For instance, a tax cut of 1 percent of state Gross Domestic Product (a very big reduction) for the bottom 90 percent of households boosts state employment by a cumulative 5.1 percent over two years.  But a similar sized tax cut for the top 10 percent results in no change at all.

For perspective, the Tax Policy Center figures the top 10 percent will make more than $190,000 in expanded cash income this year.

Zidar’s national level results were very similar. A 1 percent of GDP tax cut aimed at the bottom 90 percent of earners increases employment by about 5 percent over 2 years but the same tax cut for the top 10 percent results in a statistically insignificant increase in jobs.

The pattern is the same for tax increases: When the bottom 90 percent of households pay higher taxes, the economy slows. When the top 10 percent pay more, very little changes.

His results provide policy ammunition for both conservatives and liberals. Conservatives will point to evidence that tax changes do, indeed, affect the economy and will argue the merits of measuring dynamic effects of those revisions. Progressives will say that Zidar’s work buttresses their claim that tax cuts for the wealthy have little effect on growth.

Zidar is taking on a tough challenge by trying to calculate how tax changes for people at different income levels affect the overall economy. But whatever side of theological tax divide you sit, take a look at his paper. It will give you plenty to consider.

The post Tax Cuts for Low- and Moderate Income Households May Be Much More Powerful Than Cuts for the Rich appeared first on TaxVox.

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