Head Smacker: Tax Cuts for Low-Income People are Better for The Economy, but Congressional Budgets Cut Them


April 3, 2015

headsmacker_sqMost members of Congress will tell you that they want to grow the economy, create jobs, and strengthen and expand the middle class. But the budget outlines just passed by the House and Senate make choices that would undermine these goals.
New research confirms that tax cuts for lower- and middle-income folks are more effective than tax cuts for the wealthy at spurring economic growth. According to the paper from an economist at the University of Chicago, “tax cuts that go to high income taxpayers generate less growth than similarly-sized tax cuts for low and moderate income taxpayers.” Despite this and other similar research, both the House and Senate budget resolutions would cut taxes for millionaires and corporations while increasing taxes on working low-income families.

After looking at how tax cuts given to different income groups affected economic growth between 1950 and 2011, the economist concluded that tax cuts for the top 10 percent had little effect on job creation, while tax cuts for low-income people had a larger impact on the economy because they are more likely to spend the additional money. The author concludes that, “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%.”

CQ also noted that a September 2014 study by the Tax Policy Center found little evidence that tax cuts for those at the top cause economic growth. Related research out in February from the Center for Effective Government found that corporate tax cuts don’t equate to new jobs, despite the fact that job creation is often used as the excuse for more breaks for businesses.

Despite all of this evidence, the House budget resolution calls for unspecified cuts in personal and corporate taxes that some say would result in tax cuts to millionaires and billionaires of $50,000 to $200,000 each. Without providing specifics on tax cuts, the Senate blueprint says it will “reduce the costs to business and individuals from the Internal Revenue Code.” However, taxes would go up on working low-income families, as both budgets allows expansions of the Earned Income Tax Credit and Child Tax Credit to expire, pushing 16 million people, including almost 8 million children, into poverty or making them more deeply poor.

When Congress returns to DC on April 13, millions of Americans will be struggling to file their federal income tax returns before the deadline. If our elected officials are truly committed to enacting policies that will grow our economy and our middle class as they say, they should read the research outlined above. And as they continue to work on FY 16 budgets and possible reforms to our tax code, they should make permanent the improvements to the EITC and CTC, and pay for needed investments in human needs programs by closing loopholes and ensuring the wealthy and corporations pay a fairer share. To do anything less would not only go against what they say they’re trying to do – it would also be a Head Smacker.

Budget and Appropriations
Head Smacker
tax break
tax cuts
tax policy