Close Please enter your Username and Password
Reset Password
If you've forgotten your password, you can enter your email address below. An email will then be sent with a link to set up a new password.
Cancel
Reset Link Sent
Password reset link sent to
Check your email and enter the confirmation code:
Don't see the email?
  • Resend Confirmation Link
  • Start Over
Close
If you have any questions, please contact Customer Service


Shirleyjean 74F
93 posts
4/24/2015 12:50 pm
Why tax cuts for the middle class are best.


WASHINGTON (MarketWatch)—History shows the best kind of tax cut for the U.S. economy are those that help middle-class and lower-income Americans. That’s the verdict of a new research paper by a University of Chicago economist who has studied the issue extensively.

Owen Zidar says an examination of tax cuts at the state and federal level since World War II shows that job creation and economic growth are stronger when income taxes are reduced for the bottom 90% of earners.

Tax breaks for the richest 10% of Americans offer little help, says Zidar, an assistant professor at the Booth School of Business in Chicago. See bio.

MarketWatch: Why are tax cuts for middle class and poorer workers more likely to boost job creation and help the U.S. economy than tax cuts for the wealthiest Americans?

Owen Zidar: Low- to moderate-income workers tend to have higher propensities to consume, which can lead to larger increases in economic activity and labor demand. Labor-force participation also increases following tax cuts for this population, which is not as much the case among higher-income earners.

These responses increase economic activity and make investment more attractive. Investment tends to be stronger following tax cuts for the bottom 90%, which suggests the effects of additional economic growth on investment can exceed the effects of income changes among those more likely to save. It’s something that surprised me.

MarketWatch: You have previously explored what kind of tax cuts are best for the economy and drew similar conclusions. What’s different and more convincing about your latest research?

Owen Zidar: As far as I know, there aren’t any other economics papers with empirical evidence on the impacts of tax cuts for different types of people on total employment in the U.S. Ultimately, there simply are not that many data points at the national level, so there is an inherent amount of uncertainty in the link between tax cuts for different groups and subsequent economic activity.

What is interesting is that the state-level results in my paper, which are supported by 50 times as much data, are consistent with the national results. Both show that almost all the stimulative effect of tax cuts come from tax cuts for lower-income groups and that tax cuts for higher-income groups have small impacts in the short to medium run.

MarketWatch: Republicans contend that higher taxes on top earners especially hurt small-business owners who file taxes as individuals, a situation that could depress hiring, innovation and the creation of new startups. Are they wrong?

Owen Zidar: If these forces mattered a lot for jobs, you’d expect to see them impact employment growth following tax cuts for high-income earners. I did not find that in the data.

It is possible that there are effects that only show up with a considerable lag of more than five years after the tax cuts. However, long-term effects are harder to detect, so they are possible but the basis for that view is hard to support. [Economists] David and Christina Romer have looked at related issues using historical data and find mixed evidence on different indicators of investment and on new business formation.

MarketWatch: You are an adviser to the next president, who wants to cut taxes for the nonrich but also find offsetting spending reductions. What do you recommend?

Owen Zidar: I’d consider reforming payroll taxes, which as I have written about previously are increasingly burdensome. Expanding the earned income tax credit. And doing a targeted credit similar to the Making Work Pay Credit. Read: The growing burden of payroll taxes.

I’d pay for this by limiting individual tax deductions as a share of income, which is something that [former Reagan economic adviser] Martin Feldstein has proposed.