As Congress closes in on passing some of the biggest tax cuts in U.S. history, even conservative economists suggest the boost to the economy won’t come at rates politicians are promising.
The huge cut in the corporate tax rate from 35 percent to 20 percent would mark the biggest decrease in that rate over the last 50 years. The 1986 tax reform act lowered it 12 percentage points from 46 to 34 percent. It was raised back to 35 percent as part of the 1993 Budget Reconciliation Act to help reduce the federal deficit.
When the corporate tax rate was lowered in the 1986 reform, it added only 0.33 percent annually to what the GDP would have been, according to the conservative leaning Tax Foundation. The foundation recently estimated the bill that passed the House would add 0.35 annually to the GDP.
The organization uses a “tax and growth” model that assumes that economic growth will result from most tax cuts. But in a report looking at tax cuts going back to the Kennedy tax cuts of 1962, the group reports the impact of an entire tax cut on GDP has never been more than 0.8 percentage point gain annually.
That growth came during the Reagan tax cuts of 1981. While GDP growth was impacted by almost 1 percent per year, federal revenue dropped almost 3 percent as a percentage of GDP.
That ballooned the federal deficit and caused the Federal Reserve to raise interest rates.
Some estimates of the current tax cut proposal that passed the House this week are projecting a 4 percent annual growth in GDP from the typical 2.2 percent of the last few years. So that would be a growth rate never before experienced in tax cut history since the 1960s.
We would do well to be skeptical.
While the House proposal also cuts taxes for individuals, most notably doubling the standard deduction, it still imparts most of the benefits on corporations, with the “trickle down” assumption that they will hire, invest and build new factories.
That’s a big assumption to hang our hats on, and skeptics argue corporations will simply use the money to buy back their own stock and increase dividends—benefits that would go to the well off.
But if we want to look at the 1981 tax cuts as a barometer of where we should put most of the tax cut, it should be to individuals—and to individuals who spend more of their money.
The 1981 tax cut reduced individual rates across the board on the lowest earners from about 14 percent to 11 percent. Those reductions, the Tax Foundation argues, contributed to about half of the 0.8 percent increase in the growth rate.
Economists generally agree when lower income consumers get tax breaks, they tend to spend the money, thereby increasing consumer spending, which makes up about 70 percent of the U.S. economy.
Of course, there are those who can make reasonable arguments that tax cuts have virtually no impact on the economy. But if we believe putting more money in someone’s pocket causes them to engage in more spending, we would probably be better off giving it to consumers instead of corporations.
—Mankato Free Press