Study: Why Tax Breaks for the Rich Don't Stimulate the Economy

According to Republican presidential nominee Mitt Romney and his running mate Rep. Paul Ryan, tax breask for the wealthy stimulate the economy. This claim was also preached by former President George W. Bush, but is it really true?

Reuters reports that Owen M. Zidar, a graduate economics student at the University of California at Berkeley, has examined numbers from state level income and economic data.

Zidar is a former staff economist on the White House Council of Economic Advisers for President Obama. He also worked for an arm of Bain Capital, the firm where Mitt Romney made a fortune in private equity.

According to Reuters:

He reasoned that “if tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners.” The data show that tax cuts at the top, though, do not not result in faster growth in states with more more high-earners.

“Almost all of the stimulative effect of tax cuts,” Zidar found, “results from tax cuts for the bottom 90%. A one percent of GDP tax cut for the bottom 90% results in 2.7 percentage points of GDP growth over a two-year period. The corresponding estimate for the top 10% is 0.13 percentage points and is insignificant statistically.”

That fits with the argument made over the last century by a variety of business leaders — carmaker Henry Ford and retailer Edward Filene among them — that the path to economic growth lies in workers making enough (and having enough after taxes) to buy goods and services.


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