In a period of low economic activity, tax cuts for the bottom 90 percent of Americans are the most effective way to stabilize and assist the economy by creating jobs, a new study finds.
Owen Zidar, a professor at the University of Chicago’s Booth School of Business, recently wrote a paper studying the effects of tax cuts. For years, members of Congress have debated whether the richest of Americans should receive tax cuts – tax cuts for the rich would have a “trickle-down” effect to the middle class, many Republicans claim – or if the poor and middle-class Americans would benefit more from direct tax cuts to their incomes, which Democrats often support.
“The positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and the effect of tax cuts for the top 10% on employment growth is small,” Zidar wrote in his work, published by the National Bureau of Economic Research.
Zidar researched U.S. economies back to 1948, when the United States was at full employment following the Great Depression. Over the last six decades, the research found that tax cuts designed and implemented for the richest Americans do not assist in job creation.
The tax cuts for the wealthy actually do the opposite of what they were intended – rich Americans will save the extra cash during that time instead of investing it in the stock market, buying cars or homes, or hiring new employees if they own a business, The Wall Street Journal reported.
“I find that stimulative effects of income tax cuts are largely driven by tax cuts for the bottom 90% and that the empirical link between employment growth and tax changes for upper-income earners is weak to negligible over a business cycle frequency,” Zidar wrote.
One critic of Zidar’s research wondered why the research did not focus on other positive aspects of tax cuts for the top 10%.
Forbes writer Tim Worstall believed that Zidar’s research left out two key points of the benefits of tax cuts, specifically to do with creating jobs and investing in the future.
“One is that a cut in tax rates might make the risks of entrepreneurship more appealing. The other is that higher income earners, if taxed less, might save more and this will then finance the next round of investment in industry, thus creating jobs," he wrote.
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