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New research paper indicates tax cuts for lower income people generates higher economic activity.
I found this study to be quite interesting.
Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment
Owen M. Zidar
NBER Working Paper No. 21035
Issued in March 2015
Quote:
This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER's TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find 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% on employment growth is small.
I imagine because the lower income people plow that bit of additional money right back into the economy, while the higher income people just stash it in some offshore account where it accomplishes NOTHING.....
This used to be common knowledge, as this is why use progressive tax rates.
In these modern times, the Right wants everyone to view lower tax brackets as free loaders. But in reality, these are people who are getting tax cuts. Our tax rate is really 36% ( or whatever the top bracket is now). Everyone paying a lessor percentage is just receiving a tax cut to help them and the economy.
Funny thing is the Right argues for a flat tax, which would raise taxes on those who earn less, while lowering taxes for those who earn more. All while making the argument that the more money people keep in their pocket, the better it is for the economy. They make this argument while at the same time they are asking for a tax increase on those who earn less, who are the majority of people in the country.
The flax tax, like most right wing policys, only work for the rich. Sure, in theory, trickle down does work. It actually can work in reality. But the one thing that is always left out of the pro-trickle down argument, is the fact that it only trickles down if those at the top to allow it to trickle down. They ALWAYS have the option, and usually excercise thier option to keep it all to themselves, becuase they control the valve. Or they literally keep it at a 'trickle'.
Collective bargaining, gone. Workers rights, gone. Elections, gone (money in politics). Why would it do anything more than trickle.
OMG... Thanks bigman and latetotheparty. The more I read posts like yours the more I am encouraged to hoard and when I hoard enough, tell my employees their jobs no longer exist because I'm closing shop.
Don't forget that there's more to it than income and tax.
At different levels of income, spending targets different types of purchases that have different multiplier effects. Low income earners tend to spend small amounts on many different things and this has a greater multiplier effect than buying fewer more expensive items or one very expensive item.
Also, once one has sufficient income for "needs" the balance tends to go for "wants". Once one has sufficient income for both needs and wants then the balance tends to go for luxuries and savings. Beyond that it goes for investments.
Trickle down is supposed to come from domestic investments (international investments don't count). It makes sense, perhaps, the lowest taxes should be on those "needs", "wants", and "luxuries" spending levels which have the greatest domestic economic impact (since "savings" and "investments" are international activities).
OMG... Thanks bigman and latetotheparty. The more I read posts like yours the more I am encouraged to hoard and when I hoard enough, tell my employees their jobs no longer exist because I'm closing shop.
Sounds like you shouldn't be in business or just crazy. If you're in business, one would assume you want to make money. You cant make money hoarding because you must invest in your business or fail
If you hoard, you probably won't stay in business. Someone in the free market will simply replace you. Your employess will either be hired by that new company, or find employment elsewhere.
My point being is that the beauty of captilism is that one persons bad situation, is someone elses good situation.
So go ahead and hoard, you hurt no one but yourself. The free market will just replace you.
But I do like your cander. Good example of why we need more unions, and for more workers to stop thinking their employer is looking out for them. Thank you for your honesty, we need more honest business owners like yourself!!
It's obvious. You don't need a study to know that. Demand is low, and this would increase demand.
Tax cuts for the rich would be particularly ludicrous now, when the rich are not short of cash but rather waiting for good opportunities overseas.
But tax cuts make no sense at this time, period. Rather we need to correct the many decade old policies that got us into this situation of a handful of people taking all the economic gains.
I imagine because the lower income people plow that bit of additional money right back into the economy, while the higher income people just stash it in some offshore account where it accomplishes NOTHING.....
I'm upper income (7 figures) and don't have an offshore account. Actually, no upper income person I know has an offshore account. Don't forget the IRS rules for compliance & correctly reporting offshore accounts are quite complex and costly -- and Mrs. SportyandMisty is a JD/PhD in taxation, and even she wouldn't touch an offshore account at all. I suspect offshore accounts are more the province of the truly wealthy - say, north of $100 Million.
I suspect a more reasonable explanation of the tax reduction on upper income people not yielding a commensurate increase in economic activity is the way you measure economic activity. If my income were to flat out double, my spending patterns would change only a little. I'm not going to go drop money on things I don't value -- no designer clothing, no table service at high end clubs, no country club membership or custom golf clubs, and I'd still drive my 11 year old Durango with 115K miles (although I do wish it had a backup camera).
Instead, if income were to flat out double, I would invest more - I would become an Angel Investor (maybe 100K a year) and plow the rest back into the public equity markets and public debt markets. At the margin, this enhances liquidity and assists public companies who seek to invest. In total, this shows up as an increase in asset values and capital formation.
Capital formation doesn't happen that quickly, however. It happens a bit more slowly -- over the course of several years. The economy is better off, but not right away. So, correctly measured, yes, tax cuts on higher income people does lead to increased economic activity.
Now, tax cuts for lower income people -- well, much of that probably ends up being spent at Wal-Mart, Target, Dollar Tree, TJ Maxx, Target, Harbor Freight and other discounters, which of course are really just portals for China. A tax cut for lower income earners in the US is absolutely a stimulus program for manufacturers in China.
Nice to hear that our upper income folks are on some "Buy American" binge. I doubt that it's the case, but it's still nice to hear. Meanwhile, the poor simply spend quickly, while the wealthy take their time about it. They slow down a lot of their wealth simply by sending it off into the financial-economy, where there are low impacts on real-economy variables like jobs, growth, and output. These are part of the reason why tax cuts for low-income people have higher multipliers than tax cuts for high-income people. This isn't any secret. The study noted in the OP merely confirms what is already widely known and understood to be the case.
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