This research paper from William G. Gale of Brookings Institution and Tax Policy Centter, and Andrew A. Samwick of the National Bureau of Economic Research examines the effect of income tax changes on long-term economic growth. Although lower taxes can encourage pro-economic behaviour, such as investment, if the tax cuts are not financed by immediate spending cuts, there is an extremely large probability that they will result in an increased federal budget deficit, which, in the long run, will decrease national saving and will increase interest rates. The exact impact is uncertain, however, the results of this study suggest that lower tax rates have a small or negative impact on economic growth.
Yale graduate, CEO of "Business Insider" and late 1990s top-ranked Wall Street internet analyst, Henry Blodget writes about the tax discussions of the 2012 Presidential campaign. By incorporating evidence from the National Taxpayers Union, Blodget builds his argument that high tax rates on "rich people" do not hurt the economy. The conclusions of the analysis revealed that in the last 60 years, American government spending levels are too high in relation to tax revenue, and government spending must be cut if Americans are not willing to increase the amount of taxes they pay relative to GDP. The analysis also determines that super-low tax rates on rich people correlate with unsustainable sugar highs in the economy, and demonstrates that short economic booms are immediately followed by large economic busts. Evidence is drawn from historical events, such as the Great Depression. A third point highlighted by Blodget's article is that data suggests super high tax rates on rich people do not hurt the economy, but rather, stimulates the economy and stock market significantly, which is supported by statistics from the 1960s.
A second article from CEO of "Business Insider", and Yale graduate, Henry Blodget "destroys the theory that tax cuts spur economic growth. This "Top 100 Wall Street Analyst" provides evidence from the "Congressional Research Service" to demonstrate that there is not any correlation between the top American marginal tax rates and GDP growth. Additionally, a second chart shows that economic growth increased after tax increases in 1990 and 1993. However, 2001 tax cuts and 2003 tax cuts acceleration sent economic growth in a negative direction, plummeting almost immediately. Blodget writes that "there's not even any correlation suggesting that tax cuts spur [economic] growth", and goes on to explain how tax cuts lead to greater economic inequality, which hurts the economy. The highest earners don't spend all of the money they earn, so it is not circulated back into the economy, so it fails to become revenue for other companies and salaries for other workers. Ultimately, lower tax rates do not spur economic growth, but rather, spur economic inequality, which is detrimental to the economy.
This article identifies the faults in the macro theory that when an economy is in a recession, the government can decrease income tax rates, because households will have more disposable income, and aggregate demand will increase, spurring production, increasing GDP, and ultimately, moving the economy towards a state of equilibrium. This simple "story" is dependent on allowing the federal deficit to rise, because although tax rates are being lowered, there is no indication of a simultaneous cut in government expenditures. If this was taken into account, the lower tax rates might actually slow the economy, because government spending has a greater impact than a change in taxes, so the required cut in spending would decrease aggregate demand.
Robert J. Samuelson, economic journalist with a BA in political science from Harvard, explains how there is not "conclusive historical evidence of the relationship between tax rates and economic growth". Although lower taxes stimulate pro-grwth behaviours, such as entrepreneurship and business investment, however, past changes in tax rates have had no large or significant effects on economic growth. This research article calls upon the Congressional Research Service, which demonstrates that faster growth is not associated with lower tax rates, nor slower growth associated with higher tax rates. Trump stated that Ronald Reagan's tax cuts of 1981 were responsible for the strong economy of the 1980s, howeevr, repurts suggest that the real reason for economic boom was drop in inflation from 13% to 4% in two years, which lowered interest rates and stimulated the stock market. Samuelson continues his article with an explanation of how amongst economists, there is no consensus on the role of taxes in explaining economic growth.
Distinguished economistSergio Rebelo, PhD in Economics from the University of Rochester, and Professor Nir Jaimovich of the University of Zurich, Department of Economics conducted a study which revealed that cutting lower corporate tax rates can only spur economic growth if the current rate is exceptionally high. In countries like the US, with high corporate tax rates of 35%, tax cuts may be beneficial, but since many companies have found ways to avoid paying the full 35%, the overall economic impact may not be significant. The study revealed that fluctuating tax rates "don't seem to matter" for economic growth, but levels of extreme taxation matter significantly, because a small tax rate change does very little, and has quite a small impact, but alternatively, a large tax rate change has a disproportionately large impact. This is supported by the 80/20 rule, explaining how small actions are essential, but the large ones are able to generate far more impact. Alternatively, tax raises will not necessarily slow down the economy for similar reasons.