Former Bain Capital Economist Reports Tax Cuts For Rich Not Economic Stimulus

Earlier this year, Owen M. Zidar, a former economist for both Bain Capital and President Obama’s Council of Economic Advisers, released a paper studying the total economic impact of tax cuts on different income levels. What he reveals puts a big black mark against the Republican argument about tax cuts, including the current position being pushed by the nominee Mitt Romney.

What he showed is that even when the total tax reduction aggregate hit 50% for the top 1% over time, this reduction in taxes did not translate into GDP growth, which meant that cutting taxes on the rich did not produce new jobs as is often claimed. While tax cuts can produce economic growth, it did not come from the top, but from the bottom. In his findings, Mr Zidar put it:

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

This means that for every dollar in tax cuts to the bottom 90% you get 2076% more return than the same dollar in tax cuts to the top 10%. But under the GOP’s proposed budget, the majority of Americans would be seeing a tax increase to fund more tax cuts to the top-tier of income earners.

He further found that the bottom 30% of income earners over the past two years have produced more economic growth than the top 70% combined. The reasons for this are elementary: those at the bottom do not have spare income to save because they live paycheck to paycheck, which means that per dollar earned they will have a far greater impact on economic growth than those at higher income brackets.

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In his conclusion, Mr. Zidar finished with this:

If tax cuts for high-income earners generate substantial economic activity and job creation, then we should expect to see three things in the data. First, employment growth should tend to be higher in the years following exogenous tax cuts for the rich. Second, places with a higher share of rich people should grow faster following national tax cuts for the rich (since these areas receive more tax cuts for rich people in dollar per capita terms). Similarly, growth should be lower following tax increases on the rich, especially in places where many rich people live. None of these predictions are born out out in the data.

I fi nd that the relationship between upper income tax changes and growth is negligible in magnitude and substantially weaker than equivalently sized tax changes for the bottom 90%. The point estimates suggest that almost all of the stimulative e ffect of exogenous tax cuts is due to tax cuts for the bottom 90%. Diff erential consumption responses help explain why a dollar of tax cuts for the top 10% produces less growth than those for the bottom 90%. Investment responses are also stronger following tax cuts for the bottom 90%, suggesting that the eff ects of additional economic growth tend to exceed the e ffects from income changes among those who are more likely to save. Overall, tax cuts for the bottom 90% tend to result in more output, employment, consumption and investment growth than equivalently sized tax cuts for the top 10%.

Well said indeed.