Tax breaks. You probably hear the term a lot. For about 30 years, tax breaks for the wealthy have been the crux of the Republican party plan to stimulate economic growth. But do tax breaks really boost the economy, or is it all heresay?
The issue is one of much debate. Nonpartisan Congressional Research Service has found evidence determining that tax breaks for the wealthy do not, in fact, stimulate economic growth. But the top U.S. income tax rate is at the lowest level since the mid-1940s. In 2011, Republican Presidential candidate Mitt Romney paid 14.1 percent in taxes on an income of $13.7 million. So what’s the rub?
There’s a relatively simple theory behind why many believe the rich should pay less in taxes. It goes something like this: a richer individual is more inclined to spend money not on lavish vacations and fancy food, but on initiatives that will build infrastructure. This will allow that individual to earn a return from that capital, becoming even richer in the long run and building jobs and strengthening the economy.
But we’ve seen in the years following Reaganomics this theory hasn’t held up. Cutting the top tax rates does not fuel job growth, grow the economy or lessen income inequality.
Two experts recently took a look at the research: Laura D’Andrea Tyson, a professor at the Haas School of Business at the University of California, Berkeley, and former chairwoman of the Council of Economic Advisers under President Clinton, and Owen Zidar, a doctoral student in economics at the University of California, Berkeley, and previously a staff economist at the Council of Economic Advisers and an analyst at Bain Capital Ventures. In 2012, these experts reported in The New York Times:
“If tax cuts for high-income earners generate substantial real economic activity and job creation, then we should expect to see two things in the data. 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.
What do we actually see after combing through a half-century of economic data? Neither of these predictions is borne out…[presents evidence, along with supporting graphs]…, we have found no evidence that such cuts lead to substantially faster employment growth at the national, state or even ZIP-code level.”
Tyson and Zidar contend that tax cuts for everyone else are much more effective when it comes to creating new jobs.
“Our research found a statistically significant and positive relationship between tax cuts for the bottom 95 percent and job growth at both the national and state levels…Lower-income taxpayers spend a higher share of their tax cuts…Investment also increases after tax cuts for the bottom 95 percent…”
The research is telling, but any informed citizen should realize this is a multi-faceted issue. Are there broader questions we should be asking when it comes to taxes? Is the current tax system actually the most efficient option? And what is the government really doing with our tax money, anyway? In 2008, they bailed out banks that destroyed the world economy, but are reluctant to pour money into education and social programs.
If citizens want to ensure our tax system is fair, they need to start paying attention and voice their concerns loud and clear to public officials. PeopleCount’s new tax profiles can help to accomplish this. Parts of tax issues may be complex, but that doesn’t justify citizens being silent.
(Image courtesy Tax Credits, Flickr)