Report: Tax breaks can reduce economic growth

By Eric W. Dolan
Thursday, May 3, 2012 16:47 EDT
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Ms. Moneybags photo via Shutterstock.
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Cutting taxes is not an effective way to increase economic growth, according to a report released Thursday by The Hamilton Project.

“This report reinforces the wake-up call we have been issuing about the Republican tax proposals that – in the name of tax reform – would lead to additional tax cuts for the very wealthiest households,” Sen. Sander Levin (D-MI) said. “Republicans would make matters worse with tax proposals that would require scaling back provisions that – as reflected in the report – are vital to middle- and lower-income families, even as they maintain those provisions that benefit the very wealthy, adding to the nation’s deficit.”

Republicans have almost unanimously insisted that reducing tax rates will lead to economic growth, because people will be encouraged to invest their extra dollars and be more willing to start up their own business. However, according to the report, the benefits of tax cuts are only short-term. In the long-term, they can actually hamper economic growth by reducing the amount of money the government can invest in economic activities.

“While the evidence suggests that temporary tax cuts can help combat recessions — temporary tax cuts were an important part of the policy response to the Great Recession — the available estimates of how taxes affect the larger economy suggest that in normal economic times any potential long-run gains from lower tax rates are largely offset if they increase the deficit,” the reported stated. “Instead of increasing saving and investment, tax cuts that result in higher government borrowing reduce funds available to invest in the private sector, reducing growth.”

The reported noted that, according to the Congressional Budget Office (CBO), the tax breaks of 2001 and 2003 were estimated to reduce GDP by between $75 billion and $226 billion dollars after ten years. The tax breaks reduced government revenues by more than $200 billion per year by significantly lowering the marginal tax rates for nearly all taxpayers.

“Although these cuts included many provisions to promote saving, investment, and increased incomes, they also included sizable tax breaks for economic activity that would have happened regardless of changes in tax rates,” the report stated. “CBO estimates suggest that the increase in government borrowing to finance the cuts exceeded the benefits of lower tax rates.”

The report also found that the tax code had become less progressive over time and helped to exacerbate income inequality in the United States.

“The very people who have received the biggest income gains in the past three decades have also seen the largest tax cuts,” the report said.

The report was written by Michael Greenstone, Dmitri Koustas, Karen Li, Adam Looney, and Leslie B. Samuels to help “provide a series of facts that can help ground the policy discussion.” The Hamilton Project was founded in 2006 by the Brookings Institution, a centrist think tank.

[Ms. Moneybags photo via Shutterstock]

Eric W. Dolan
Eric W. Dolan
Eric W. Dolan has served as an editor for Raw Story since August 2010, and is based out of Sacramento, California. He grew up in the suburbs of Chicago and received a Bachelor of Science from Bradley University. Eric is also the publisher and editor of PsyPost. You can follow him on Twitter @ewdolan.
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