According to Adam Michel at the Cato Institute, new research from NBER shows that tax cuts boost economic growth and business investment. You have probably known that since at least the Reagan Administration, but, explains Michel, less robust research like that from the American Compass still argues that tax cuts have little effect. Michel writes:
New research shows that the 2017 tax cuts significantly raised business investment and boosted economic growth. This most recent study is the latest entry in a long catalog of economic research that finds taxes matter for investment, economic growth, and labor market outcomes. Despite this history of robust results, a recent American Compass report argues that the 2017 Tax Cuts and Jobs Act did not significantly impact the economy. More sophisticated economic analyses almost universally find the opposite: taxes matter for investment and growth.
Economists have known this for decades. In a 2012 academic literature review, Will McBride summarizes 26 studies on the empirical relationship between taxes and economic growth. He finds that “all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.” The research also consistently finds that corporate income taxes are the most economically harmful.
In a more recent 2019 retrospective review of new empirical fiscal research following the 2008 financial crisis, Valerie Ramey shows that, almost universally, tax increases are estimated to reduce GDP. The most consistent result from the time series estimates reviewed shows that GDP declines by between two and three times the revenue the new taxes raise.
The most recent entry in this long list of research uses variations in how the 2017 tax reform impacted different corporations differently. The researchers estimate that the tax cut “caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change.” The authors extrapolated their short‐run estimates to assess the long‐run effects of the law. Their results are consistent with some of the most optimistic modeling of the TCJA’s economic and revenue effects, finding significant increases in capital stock, productivity, and wages.
Action Line: You know some things in your gut. One of those is that money goes where it’s treated best. You know that because you’re a small business owner or successful professional who has counted every dollar that goes out the door to pay taxes and wondered if you’d ever see it again. If your money isn’t being treated well, and you want to move somewhere it’ll get more respect, start your search with Your Survival Guy’s 2023 Super States. Click here to subscribe to my free monthly Survive & Thrive letter, and be one of the first to receive updates to my Super States map.
