FACT CHECK: Is There ‘No Evidence’ Tax Cuts Lead To Economic Growth?
Former Labor Secretary Robert Reich said there’s no evidence tax cuts have ever led to economic growth on CNN Tuesday.
“The claim here from Republicans is that this is going to be – this is going to add to growth,” said CNN host Jim Sciutto.”Why? You’re going to put more money in the hands of corporations, and that the middle class is going to get a tax cut as well. What’s your response?”
“Well, there’s no evidence that has ever been the case, Jim. The way you grow the economy is you invest in people,” said Reich.
Many economic studies and historical data suggest that tax cuts can spur economic growth.
The effect of taxes on economic growth is hotly debated between different schools of economics, with both sides providing evidence to support their claims. The Republican tax plan has intensified that debate. But Reich goes too far when he says there is “no evidence” tax cuts lead to growth.
In a roundup of 26 studies examining the relationship between taxes and economic growth from the Tax Foundation, all but three found that economic growth decreases with tax hikes.
“While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy,” said the Tax Foundation report.
One study from economists at the University of California, Berkeley found that a tax increase of 1 percent of gross domestic product (GDP) could reduce output by 3 percent over the next three years. “In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output,” said the study.
Jeffrey Miron, an economics professor at Harvard University, says historic data shows tax cuts can generate short- to medium-term spurts of growth in GDP.
Many economists say former President John F. Kennedy’s tax cuts for individuals and businesses fueled economic growth in the 1960s. After Reagan cut income taxes in 1981 during a recession, the economy grew substantially – though he paid for those tax cuts with tax increases in other areas the next year.
“It’s an undisputed economic reality that if you tax something you get less of it, and if you reduce taxes you get more of it,” Mark Perry, a scholar of economics at the American Enterprise Institute, told The Daily Caller News Foundation in an email.
Other economists, however, argue there’s a lot of reason to doubt that tax cuts boost economic growth. Since 1868, growth has averaged around 2 percent. William Gale, co-director of the Tax Policy Center, says increased taxes around World War II did not leave a long-term economic burden, and changes in the top income tax rate did not have a statistically significant effect on economic growth.
“There have been huge changes in taxes throughout US history with virtually no observable shift in growth rates,” wrote Gale in a post.
It isn’t a rule that economic growth follows tax cuts. Democrats and liberals point to lackluster growth after Reagan’s second tax cuts in 1986, followed by a small recession during President George H. W. Bush’s presidency. The economy slowly declined after President George W. Bush’s tax cuts in 2001 and 2003.
Those results may have something to do with the design of those cuts. The 1986 tax cuts lowered corporate and individual tax rates but closed some loopholes and exemptions, so the effect was revenue neutral. “They really just took money from one part of the tax code and put it into another,” Gordan Gray, fiscal policy director at the American Action Forum, told TheDCNF.
Gray said the latest tax bill isn’t comparable to the second Reagan cut because it has a very different design. The across-the-board business and individual tax cuts aren’t offset with tax increases in any area and will be paid for with $1.5 trillion in debt. Gray expects the substantial business tax cuts to drive economic growth.
It’s hard to definitively prove the effects of tax cuts on the economy because of numerous factors that impact economic growth like government spending and monetary policy. But businesses moving headquarters from one place to another due to tax rates provides more conclusive evidence that lower tax rates create a more favorable business climate.
“The high US corporate tax rate has clearly encouraged the ‘inversion’ trend where companies move their headquarters to foreign lower-tax countries. So that tells us that corporations are responsive to different tax rates between countries,” Chris Edwards, director of tax policy studies at the Cato Institute, told TheDCNF in an email.
While the link between tax cuts and economic growth is not definitive, it’s incorrect to say there is no evidence to support the argument.
“I personally believe that taxes have a big effect on growth, but liberal economists simply don’t agree,” said Edwards. “Economics is not a ‘hard’ science like chemistry!”
Reich did not respond to a request for comment.
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