The Argument Against Cutting Marginal Tax Rates

In her most recent Washington Post column Catherine Rampell finally gets around to giving some reasonable reasons to be against the tax cuts proposed by the Trump Administration:

In fact, in a recent paper, University of Chicago Booth School of Business economics professor Owen Zidar looked at changes to the tax code over the postwar period, with an eye toward comparing the economic effects of tax cuts felt by the rich vs. the poor. He found that the relationship between tax cuts and job growth is primarily driven by cuts for lower-income groups and that the economic effects of tax cuts for the top 10 percent are tiny.

A slew of earlier studies on the earned-income tax credit supports this view that tax policy aimed at putting more money in the pockets of the poor and lower-middle-class provides a bigger bang for your buck.

Or maybe you think cutting corporate taxes and capital gains rates would encourage more investment. This argument would be more convincing if companies were not already sitting on mountains of cash that they can’t find sufficient investment opportunities for. Or if the last time we tried something similar there had been any effect at all on corporate investment. (There was none.)

As I’ve said before, those who think that cutting the marginal personal income tax rate will do much to stimulate the economy are engaging in nostalgia. They’re thinking of an economy very unlike the one we have now in which so many consumer goods are made in another country or an increase in retail will result in hiring more employees in brick and mortar stores. Retail is already over-capacity.

Although I support cutting the marginal business income tax it’s for very narrow reasons. The business income tax is inefficient. The burden of high rates falls on employees. Our having higher rates than other OECD countries incentivizes inversions which prompt decreases in higher-paying jobs here.

The cut in personal taxes most likely to stimulate the economy would be a cut in the payroll tax but that would need a change in the way that SSRI is thought of and funded. Mustn’t have that. The people it would help most are too deplorable.

4 comments… add one
  • Andy

    I agree it doesn’t make much sense, especially since effective rates are what really matter.

  • I think that the notion arises from the article of faith, widespread among Republicans, that tax cuts always produce growth. My usual answer is “It might; just not here.”

  • Guarneri

    Its all a matter of faith. In the last paragraph of page 1 he skewers his own study, and then tries to recover with the, shall we say, unconvincing, notion that tax changes state by state dominate state issues. In any event, under a theory of any tax cut is better than no tax cut, do it.

    My question is this: since no real level of income taxes are paid by the bottom half, the bottom 70% really. That leaves only payroll taxes. Just how big a tax cut is this going to be?

    But go ahead, do it. I’d love to be wrong, but I bet I’m not. You wont get much lasting effect. And I doubt the Democrats have the will to do it. They love the tax dollars too much, and it takes away a demagogic tool.

  • Just how big a tax cut is this going to be?

    I think it should be suspended.

    You wont get much lasting effect.

    Actually, I agree with that. Indeed, that’s what we learned from the “Bush tax cuts” and those took place at a point in the business cycle when their doing some good was more likely.

    However, if you were trying to decide which measures would do more (however little) good, I’m pretty confident in conjecturing that cutting FICA would be better than cutting the topmost marginal tax rate.

    My support for cutting the business income tax is more along the lines of minimizing downside risk.

    And I doubt the Democrats have the will to do it.

    They almost undoubtedly don’t. The tax was re-imposed the last time they held the House.

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