Monday, October 22, 2012
The centerpiece of Mitt Romney’s tax plan is an across-the-board 20% cut in marginal tax rates. This cut, along with a few other tax changes Mr. Romney has endorsed – such as repeal of the estate tax and the alternative minimum tax – would reduce federal tax revenue from personal income and payroll taxes by an estimated $3.6 trillion to $3.8 trillion over 10 years.
The total is closer to $5 trillion when Mr. Romney’s proposed cut in the corporate income tax rate to 25% is included. About two-thirds of this amount would go to taxpayers making $200,000 a year or more – about 5% of all taxpayers.
Extending the Bush tax cuts for high-income earners, as Mr. Romney proposes, adds another trillion in lost revenue and increases the share of the benefits going to the top 5%. Even if the cost of the Romney tax cuts for the top 5% is covered by base-broadening measures, as Mr. Romney promises -- but as President Obama and many others assert is mathematically impossible -- does it make sense to devote trillions of dollars to lowering income taxes for the top 5%? Is this an effective way to create jobs?
Mr. Romney appears to think so. His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment -- that lower taxes for job creators create jobs and will do so quickly. This assertion, while superficially convincing and ideologically compelling, is not supported by the evidence.
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. ...
The table below highlights three of these tax changes -- the Reagan tax cut of 1982, the Clinton tax increase of 1993 and the Bush tax cut of 2003 -- and subsequent employment growth. Strong employment growth followed the Reagan cut, but the employment growth following the Clinton tax increase exceeded the employment growth following the Bush tax cut, which was comparable in size to the Reagan cut.
Job growth at the state level after national tax cuts for high-income earners confirms the absence of a strong link between such cuts and the pace of job creation in the next two years. ...
Cross-country comparisons also do not show a close link between top marginal rates and growth. ...
[I]f the priority is to create a substantial number of jobs over the next presidential term, evidence from the last half-century strongly suggests that tax cuts for the top 5% won’t work. Tax cuts for working families, tax cuts directly aimed at expanded hiring or increases in infrastructure investment would have much more bang for the buck and would cost much less in terms of forgone revenue and deficit reduction in the future.
With elevated unemployment, weakness in Europe and slowing growth in emerging economies, fiscal measures that actually increase economic activity and employment in the near term are required. Our research shows that tax cuts for the rich do not meet this standard.