Do Tax Cuts Bring About Economic Growth?
President-elect Donald Trump has said he plans to cut taxes for individuals and corporations in order to stimulate the economy and create jobs.
Republican Presidents Ronald Reagan and George W. Bush also cut taxes with the same reasoning during their time in office. But cutting taxes doesn’t necessarily guarantee economic growth.
On tax cuts during the Ronald Reagan presidency
“The thing about the Reagan years is that there were actually three major tax bills. So he passed very large tax cuts early on in his administration, rolled back a significant fraction of them a year later, and then towards the end of his administration signed the major 1986 tax reform. So he has a complex tax legacy.
“I think in the quote that you ran, he’s right to say that, if you lower people’s tax rates, that that by itself can encourage them to work, save and invest more, and can contribute to the economy. What he left out though is that, if you do that without finding a way to pay for it, so that at the same time you’re also increasing deficits, those deficits over time have a tendency to crowd out private investment, and therefore to weaken the overall economy. And so, if all you’re doing is tax cutting, it’s actually very hard to make that a long-run economic boost, even though obviously in the short run, putting more money in people’s pockets can provide a short-run boost.”
On tax cuts during the George W. Bush presidency
“So again, a complicated legacy. President Bush signed significant tax bills,. obviously the 2001 one, did more in 2003, and then also passed some tax cuts in 2008 as part of the effort to combat the economic collapse. In 2001, you’ll notice that his quote mostly focused on the effect of putting more money in people’s pockets at a time of economic weakness. That’s kind of the classic, Keynesian, demand-side argument, that if the economy is turning down, you should cut taxes — and possibly spend more government money — as a way to help support the economy. I think the evidence that it provided some limited boost at the time, and would expect that to happen even today if we did some sort of tax cuts. Beyond that, very complicated period in economic history with all the other things happening, and hard to tell exactly what the effects are. You know, obviously, not a giant effect on economic growth.”
On his advice for policymakers and the Trump administration
“The top-level advice is that not all tax changes are created equal, not all tax cuts are created equal, and you should think carefully about what it is you’re trying to accomplish. There’s clearly an opportunity to improve the way we tax businesses — America’s an outlier, relative to the rest of the world, tax rates have come down elsewhere, we’re not the most attractive place to invest, you wanna think about a way of designing the tax system so investment inside the United States, which creates better paying U.S. jobs, is not discouraged by our tax system. And then you also ought to think about the concerns about deficit, and that, if you wanna do significant tax changes, you should think about ways to pay for it, perhaps by rolling back other tax provisions that really aren’t that beneficial.”
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