Cutting Taxes on Millionaires DOESN’T Increase Economic Growth

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I’ll try to keep this post short. The question is whether or not cutting taxes on the super-rich actually does as much as those who advocate it think it should.

A new study out by Laura Tyson and Owen Zidar of UC Berkeley suggests that Romney’s tax plan advocating a 20% across the board tax cut would do better if it were all allocated to those at the bottom. Their research completely shoots the “job creator” argument out of the water and suggests that changes in employment are almost entirely a result of changes in the tax rates of the other 95%.

So back to Romney’s tax plan. The plan basically gives a 20% tax cut to all income levels, where about 2/3 of which is slated to be taken in by the top 5%, those making over $200,000 a year in taxable income. The idea is simple, give these people money, people who can invest it, and they will hire the employees from the bottom. There is a missing link here however, why would you supply something that no one will buy?

This is the general problem with Romney’s assertion, whether or not I have $100,000 or $1,000,000 if people don’t want my product it doesn’t all of a sudden make sense to start producing it when I have $1,000,000 – a loss is a loss. For people to make investments and hire workers, there needs to be demand to buy a product. If you give money to those who already have money, their propensity to demand additional consumer goods is not as great as a middle-class family who has been putting off a big purchase due to financial constraints.

So that is my take. But what about this study? For Romney’s assertion to be upheld they say we would expect to see two things:

First, employment growth should be stronger in the years after tax cuts for these earners. Second, parts of the country with a larger share of high-income earners should experience stronger employment growth after national tax cuts for these taxpayers, because the places where they live receive a larger share of the national tax cuts.

Their results confirm neither of these occurrences, in fact the unemployment rate is largely unchanged no matter the tax rate:

As you see, the line is almost flat, which means regardless of a change in the tax rate for the top income earners employment not appear change. In fact, the slope is positive, meaning there is a correlation between taxing the rich and increasing employment (I highlighted this here). They also ran this on the top 90% and found no significant change in employment. No matter the geographic scope (they look at national, state, and zip-code level) there is no effect.

But when we look at tax cuts for the bottom 95% we see a better forecast.

Here you see a clear negative slope that indicates reducing taxes on the bottom 95% does significantly improve employment.

The fact is, as is shown here, that we are a demand controlled economy. When you give money to those who want to spend it and are otherwise unable to, we improve our economic fundamentals. We see GDP increase and employment comes along with it as manufacturers have to catch up to product demand.

You’d all be best to write your representatives and tell them to stop the tax cuts to the rich and instead increase the ones to the bottom 95% (cost-wise it is the same as tripling them). So I leave you with that. You can read the full article outlining the Tyson and Zidar study in the New York Times here.

You can sign the Citizen’s Pledge to Stop the Gridlock (including stopping the Bush tax cuts for the wealthy here.)

6 thoughts on “Cutting Taxes on Millionaires DOESN’T Increase Economic Growth

  1. Pingback: Cutting Taxes on Millionaires DOESN'T Increase Economic Growth | Economic Features | Scoop.it

  2. Reply MsShona Oct 22, 2012 4:22 am

    Thank you for this post! It is short and to the point. What is shocking to me is that the trickle-down economics theory didn’t work for us in the 80s; so why would it work now? Isn’t it Einstein who said that “Insanity is doing the same thing over and over again and expecting different results.”? Of course an ongoing problem is for politicians to stick by their guns, and not be swayed by lobbyists. But that an entirely different conversation I guess!

  3. Reply PeterC Oct 22, 2012 3:50 pm

    Those arguing for tax cuts for the wealthy are after the same results the have gotten in the past, tax cuts for the wealthy. Hard to believe that they ever believed in trickle down. But as their interest begins and ends in obtaing tax cuts for the wealthy, regardless of the consequences for the rest, they will continue to spout claims that those cuts will help everyone.

  4. Reply Robin Feb 5, 2013 8:46 pm

    Right you are! Trickle-down economics has been proven not to work. Best to provide tax relief to those on the bottom who will actually spend the savings on providing for their families, with an outcome of more goods being produced and thus stimulating the economy. Those in the upper brackets wouldn’t necessarily spend their tax savings and more of their money would be tied up not spent in the community.

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