Tax cuts for middle, lower income Americans boost economy while tax breaks for the rich do little to help

A new study by University of Chicago Booth School of Business Assistant Professor of Economics Owen Zidar found that the stimulative effects of income tax cuts are largely driven by tax cuts for the bottom 90 percent of earners and that the empirical link between employment growth and tax changes for upper-income earners is weak to negligible.

Some economists argue that tax cuts for rich Americans help to create jobs because the highest earners often own businesses and can hire workers. Zidar finds no support for this hypothesis in U.S. employment data.

The tax cuts for ordinary Americans spur increased economic activity in the form of durable consumption, investment, and labor force participation, Zidar says. The effects hold at both the state and federal levels and are larger in states with high unemployment rates.

The working paper "Tax Cuts for Whom: Heterogeneous Effects of Income Tax Changes on Growth and Employment" was published by the National Bureau of Economic Research. The study uses new data and a novel source of variation to quantify the importance of the distribution of tax changes for their overall impact on economic activity.

The study is unusual in that it is believed to be the first study that relies on empirical evidence to measure the impacts of tax cuts for different types of people on total employment in the U.S.

"I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10% on employment growth is small," Zidar says.

Working paper: http://www.nber.org/papers/w21035