U-Chicago: Supply-Side Economics Only Works When Taxes Are Cut For Working Poor
According to a new paper published in the University of Chicago’s Journal of Political Economy, tax cuts are most effective at promoting employment growth when given to lower-income groups.
This contradicts one of the key ideas backing supply-side economics, which argues that corporate tax cuts and tax cuts for the wealthy will “trickle down” to low-income households by the means of greater employment and cheaper products.
Princeton University professor Owen Zidar analyzed tax changes and tax return data from the period following World War II for his study to examine different tax changes at both the state and federal level. He found “that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small.”
“If policy makers aim to increase economic activity in the short to medium run, this paper strongly suggests that tax cuts for top-income earners will be less effective than tax cuts for lower-income earners,” Zidar concluded.
“While it is possible that tax cuts for top-income earners have sizable long-run impacts through different channels such as human capital investment, firm creation, or innovation, much more compelling evidence on these channels is needed to support top-income tax cuts on efficiency grounds, especially given the magnitude of resources devoted to these tax policy changes.”