Tax cuts for the wealthy, a common economic development tool in recessionary times, do not create jobs as conservative politics contend. But tax cuts for everyone else leads to higher employment and production in the economy, according to research by Chicago Booth’s Owen Zidar.
Zidar’s working paper, posted at National Bureau of Economic Research in March, addresses an old controversy with a simple proposition. Tax cuts for wealthy presumably lead to more jobs because the rich own businesses, and they use their windfalls to expand them. If that’s true, Zidar postulates, then states with the biggest portions of wealthy individuals should experience job growth afterward.
Instead, Zidar finds that tax cuts for lower- and middle-class taxpayers account for nearly all the economic stimulus provided by tax cuts.
Zidar derives these results from analysis of individual tax returns following federal tax rate changes, with which he creates a measure of who received, and who paid for, each change. The micro data paired with state economic indicators allowed him to measure how employment growth responded to tax shocks for different income groups.
Zidar’s work adds empirical evidence to the debate over the effectiveness of tax cuts as economic stimuli. Research on the issue has been complicated by several factors, including limited nationally aggregated data and broad economic changes that occur independently of tax changes.
Read more coverage of the study at the Wall Street Journal’s “Real-Time Economics” blog.