# What evidence that cutting taxes on the rich works to stimulate economy? **URL:** \ **Category:** Politics & Elections\ **Created:** [September 6, 2012, 10:50pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919 "2012-09-06T22:50:38Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Hedda\_Rosa](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hedda_rosa/32/1204_2.png) [@Hedda\_Rosa](https://boards.straightdope.com/u/Hedda_Rosa)\ **Post date:** [September 6, 2012, 10:50pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/1 "2012-09-06T22:50:38Z")
I am a staunch supporter of Obama, lets state that up front. I understand in a vague and misty way the broad strokes of Keynesian economics and am on board with using stimulus to restart an economy. But. I’m eager to understand the other side so that I’m making an informed decision, and right now I know zip. I think Romney and Ryan are misguided, often dishonest and thin on details, but Republicans can’t be campaigning on “it sounds like it should work” can they really? So I’d like to look myself first-hand at what is being used to support the idea that tax cuts on the wealthy lead to economic growth. So I have 2 questions: 1. What real, historical evidence there is to support the Romney/Ryan plan (assertion?) that cutting taxes on the rich leads to job creation and economic growth? When has then been proven in actual real life? I suppose they may just be working on theory and not have historical evidence to back it up, but if they are supporting their claims with evidence, what is that evidence they are using? I’m envisioning charts, with circles and arrows on the back of each one showing “we cut taxes on job creators here” and “Unemployment rates started dropping and GDP started growing here”. 2. What academic papers or other real research - not blog posts and crap - are used to make their assumptions? Who are their guiding lights in terms of economists or whatever? What books describe for the layperson how it works, and makes the case that everyone should get on board with the idea? I’m not looking for glib or partisan answers but instead really want the opportunity to be an educated and informed voter. ---
**Author:** ![Finagle](https://avatars.discourse-cdn.com/v4/letter/f/b19c9b/32.png) [@Finagle](https://boards.straightdope.com/u/Finagle)\ **Post date:** [September 6, 2012, 11:15pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/2 "2012-09-06T23:15:55Z")
Well, the [Laffer curve](http://en.wikipedia.org/wiki/Laffer_curve) is one place to start (the questionable assertion being that the apex of the curve is to the left of where we are now). ---
**Author:** ![Linden\_Arden](https://avatars.discourse-cdn.com/v4/letter/l/53a042/32.png) [@Linden\_Arden](https://boards.straightdope.com/u/Linden_Arden)\ **Post date:** [September 6, 2012, 11:23pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/3 "2012-09-06T23:23:04Z")
You don’t specify which tax - income or capital gains. Warren Buffett says he never thinks about taxes when investing and he is one of the few honest billionaires alive. Of course he does not pay income taxes other than on his modest salary. Capital gains taxes are now 15% and some on the right want zero. For benefits there you will find no evidence at all. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [September 7, 2012, 12:11am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/4 "2012-09-07T00:11:29Z")
> [@Finagle](#): > > Well, the [Laffer curve](http://en.wikipedia.org/wiki/Laffer_curve) is one place to start (the questionable assertion being that the apex of the curve is to the left of where we are now). Ah, yes, the Laffer curve. One problem is, nobody really knows what a Laffer curve is supposed to look like. [There are others.](http://rationalwiki.org/wiki/Laffer_Curve) > [@](#): > > **Argument** > The argument for lower taxes goes something like this: > 1.If the income tax rate were 0 percent, the government gets zero revenue because it isn’t collecting any money. > 2.If the income tax rate were 100 percent, nobody has an incentive to work in taxable jobs[1] because nobody gets to actually keep any money they earn. So nobody works in taxable jobs. When nobody works in taxable jobs, nobody has taxable income to tax. Therefore, the government gets zero revenue in this instance also. > 3.Given 1 and 2, the government revenue is maximized at some tax rate between 0 and 100 percent. The Laffer curve is a plot of government revenue as a function of tax rate. It is zero at 0% and 100% tax rates, and it looks something like a parabola. Where the maximum occurs is a wild-ass guess[2]. > 4.Given 3, taxes should be slashed. > > **Why the argument is not currently valid in the United States** > Unfortunately, economics sometimes requires drawing what appears to be a hand-wavy curve between two points, that has much more meaning to real economists but may not be well understood by partisans. To make a statement that cutting taxes will always raise tax revenue is simply ridiculous. > > - Obviously a country can’t have a 100% tax rate. However, even if the top-earner tax rate was very high (say, 95%), people would still work. After all, keeping 5 percent of your wages is better than earning nothing at all. The highest income tax bracket rate in the United States was close to 90% around World War II, and everything seemed to work just fine then (though the 95% tax rate only applied to a select few past a very, very high income level for the time). > - Point 4 above does not necessarily follow from point 3. Assuming the Laffer curve’s assumptions are correct, cutting taxes would only increase government revenue if the current tax rate is greater than the “optimal” tax rate (where optimal means the rate that maximizes government revenue, not necessarily the optimal tax rate for the overall economy and society). If the current tax rate is on the wrong (left) side of the maximum in the Laffer Curve, cutting taxes decreases revenue. > - To justify cutting taxes on the basis of raising revenue, the Laffer curve’s proponents have to, first, define the “ideal” tax rate that maximizes revenue; and, second, show that the current tax rate is on the wrong side of the “ideal” tax rate (again, ideal means the rate that maximizes revenue, not necessarily the ideal tax rate for the economy or society). You can’t just shout “Laffer Curve!”, decrease taxes, and expect everything to be great. > - One study of the United States between 1959 and 1991 placed the revenue-maximizing tax rate (the point at which another tax rate increase would decrease tax revenue) at between 32.67% and 35.21%.[3] In 1991 the “average” tax rate was 19.58%. The US is currently on the lower side of the maximum tax rate predicted by Laffer’s curve. Hsing also concluded that Reagan’s tax cuts reduced revenue, since the average tax rate at the time was only 20.41%. > - This is an “average” or overall rate. In a progressive tax system, lower income people should be paying, approximately, a total tax of 10-15% and upper income people in the 60-70% range, comparable to the 70% that was found to give an optimal result in Sweden in the 1970s.[4] > The current (2010) highest tax bracket rate in the U.S. is 39.6%. A worker earning about $20,000 a year pays a 15% income tax plus almost 15% in “payroll” taxes towards the Social Security and Medicare/Medicaid programs, or about 8% less than the tax rate paid by someone earning a hundred times as much.[5] ---
**Author:** ![Frylock](https://avatars.discourse-cdn.com/v4/letter/f/ce7236/32.png) [@Frylock](https://boards.straightdope.com/u/Frylock)\ **Post date:** [September 7, 2012, 12:25am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/5 "2012-09-07T00:25:38Z")
What does maximizing government revenue have to do with job creation and economic growth? ---
**Author:** ![Snarky\_Kong](https://avatars.discourse-cdn.com/v4/letter/s/a183cd/32.png) [@Snarky\_Kong](https://boards.straightdope.com/u/Snarky_Kong)\ **Post date:** [September 7, 2012, 1:05am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/6 "2012-09-07T01:05:37Z")
> [@Frylock](#): > > What does maximizing government revenue have to do with job creation and economic growth? The argument behind the Laffer curve is that lowering taxes will create jobs and grow the economy which will increase tax revenue. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [September 7, 2012, 1:37am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/7 "2012-09-07T01:37:59Z")
> [@Snarky\_Kong](#): > > The argument behind the Laffer curve is that lowering taxes will create jobs and grow the economy which will increase tax revenue. There seems to be a lot more real-world evidence that **government spending** will create jobs and grow the economy which will increase tax revenue. Keynes was not wrong. (Not that increasing tax revenue is the point of the whole thing.) ---
**Author:** ![gamerunknown](https://avatars.discourse-cdn.com/v4/letter/g/6bbea6/32.png) [@gamerunknown](https://boards.straightdope.com/u/gamerunknown)\ **Post date:** [September 7, 2012, 8:41am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/8 "2012-09-07T08:41:42Z")
> [@RationalWiki](#): > > If the income tax rate were 100 percent, nobody has an incentive to work in taxable jobs because nobody gets to actually keep any money they earn. So nobody works in taxable jobs. When nobody works in taxable jobs, nobody has taxable income to tax. Therefore, the government gets zero revenue in this instance also. This isn’t a great argument. Not even going to take issue with the conclusion, but the premise is flawed since people are capable of hyperbolic discounting: people work for no immediate reward. If the adherents to the Laffer curve philosophy were serious, they’d take fault with wage rates (at least hourly wage rates) for not giving people the full product of their labour. If people take a purely mercenary view and do not expend effort beyond the median when not fully remunerated, that’s a feature both of wage labour and gregarious labour. That said, I think they’d point to Reagan. He advocated “supply side” economics by redistributing wealth to the upper class and employment increased during presidency. There are minutia there that other posters will explain, such as massively increasing the governmental debt and increasing taxes. ---
**Author:** ![Frylock](https://avatars.discourse-cdn.com/v4/letter/f/ce7236/32.png) [@Frylock](https://boards.straightdope.com/u/Frylock)\ **Post date:** [September 7, 2012, 10:16am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/9 "2012-09-07T10:16:29Z")
I’m disappointed that no advocates for the view have come in to give the evidence! ☹ ---
**Author:** ![adaher](https://avatars.discourse-cdn.com/v4/letter/a/dec6dc/32.png) [@adaher](https://boards.straightdope.com/u/adaher)\ **Post date:** [September 7, 2012, 10:59am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/10 "2012-09-07T10:59:05Z")
Now I’m not an expert on Keynes, but isn’t ANY tax cut a stimulus under Keynesian theory? ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [September 7, 2012, 11:14am UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/11 "2012-09-07T11:14:41Z")
> [@gamerunknown](#): > > This isn’t a great argument. Not even going to take issue with the conclusion, but the premise is flawed since people are capable of hyperbolic discounting: people work for no immediate reward. If the adherents to the Laffer curve philosophy were serious, they’d take fault with wage rates (at least hourly wage rates) for not giving people the full product of their labour. If people take a purely mercenary view and do not expend effort beyond the median when not fully remunerated, that’s a feature both of wage labour and gregarious labour. You are just nit-picking around the edges. Even if you are right that 100% tax will not result in nobody working, it will be close to zero, and does not materially alter this discussion. I am sure that there is something like the Laffer curve in effect, with revenues at or close to zero at both ends. However, I am not aware of any evidence that we are currently to the right of the apex and therefore a tax cut will increase revenue. The OP question has interested me for a while because I have heard the right argue the case, with examples, that tax cuts stimulate the economy, and the left, with examples, that it does not. The examples from the right include tax cuts by Harding, Truman, Kennedy and Reagan, plus they cite a slump in the economy following FDR’s tax increases in 1937. The left counter with Bush 43 and the fact that Clinton raised taxes and the economy grew. So it seems to me that the position may well be: tax cuts sometimes stimulate the economy but there are other factors in play. Note also that with the upcoming fiscal cliff, many economists state that the combination of tax increases and spending cuts will drive us back into recession. Keynesians will focus on the damage caused by spending cuts (see Paul Krugman’s gazillion articles on the failure of austerity programs in Europe where he lambastes spending cuts while never mentioning the tax increases), and the right focuses on tax cuts while not acknowledging any possible harm caused by spending cuts. ---
**Author:** ![Zakalwe](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/zakalwe/32/270_2.png) [@Zakalwe](https://boards.straightdope.com/u/Zakalwe)\ **Post date:** [September 7, 2012, 1:55pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/12 "2012-09-07T13:55:44Z")
> [@adaher](#): > > Now I’m not an expert on Keynes, but isn’t ANY tax cut a stimulus under Keynesian theory? I believe the issue is not that cutting taxes isn’t stimulative, it’s about the efficiency and effectiveness of the stimulus. Not all stimuli are created equal and tax cuts appear to be among the least efficient. At least that’s my understanding. ---
**Author:** ![Euphonious\_Polemic](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/euphonious_polemic/32/3002_2.png) [@Euphonious\_Polemic](https://boards.straightdope.com/u/Euphonious_Polemic)\ **Post date:** [September 7, 2012, 2:25pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/13 "2012-09-07T14:25:52Z")
> [@Zakalwe](#): > > I believe the issue is not that cutting taxes isn’t stimulative, it’s about the efficiency and effectiveness of the stimulus. Not all stimuli are created equal and tax cuts appear to be among the least efficient. At least that’s my understanding. There is also going to be a big difference in stimulus effect between giving 10 million people $500 each in tax cuts vs. giving 500 people $10 million each in tax cuts. In the former case, that $500 is going to be spent fairly quickly, and spread around the economy in a diverse fashion. In the latter case, chances are that the money will simply be added to the cash horde that companies are currently sitting on. Or it will be sent to overseas accounts or companies, if folks like Romney are any indication. ---
**Author:** ![adaher](https://avatars.discourse-cdn.com/v4/letter/a/dec6dc/32.png) [@adaher](https://boards.straightdope.com/u/adaher)\ **Post date:** [September 7, 2012, 3:04pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/14 "2012-09-07T15:04:50Z")
> [@Zakalwe](#): > > I believe the issue is not that cutting taxes isn’t stimulative, it’s about the efficiency and effectiveness of the stimulus. Not all stimuli are created equal and tax cuts appear to be among the least efficient. At least that’s my understanding. I think it depends on how high taxes are already. If effective rates are 40% and you lower them, it probably creates a lot more demand than if you lowered them from a 20% effective rate. ---
**Author:** ![adaher](https://avatars.discourse-cdn.com/v4/letter/a/dec6dc/32.png) [@adaher](https://boards.straightdope.com/u/adaher)\ **Post date:** [September 7, 2012, 3:06pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/15 "2012-09-07T15:06:56Z")
> [@Euphonious\_Polemic](#): > > There is also going to be a big difference in stimulus effect between giving 10 million people $500 each in tax cuts vs. giving 500 people $10 million each in tax cuts. In the former case, that $500 is going to be spent fairly quickly, and spread around the economy in a diverse fashion. In the latter case, chances are that the money will simply be added to the cash horde that companies are currently sitting on. Or it will be sent to overseas accounts or companies, if folks like Romney are any indication. I don’t think that’s really right either because if we assume that the American economy is heavily dependent on buying American-made goods, an extra $500 doesn’t cut it. It will only enrich the agriculture sector(who are doing quite well right now), oil companies(okay, some employment there), and foreign manufacturers who sell products cheaply enough that you can spend $500 and buy a new TV or computer. I also don’t think any economists really know what the multiples are for different types of spending and tax cuts. ---
**Author:** ![Crafter\_Man](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/crafter_man/32/458_2.png) [@Crafter\_Man](https://boards.straightdope.com/u/Crafter_Man)\ **Post date:** [September 7, 2012, 3:28pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/16 "2012-09-07T15:28:30Z")
If you give people a tax cut, then they will do something with the money that otherwise would have gone to the government. _Anything_ they do with this money will end up helping other people (and thus the economy), either directly or indirectly. The only exception is if the money went overseas. Or if they stuffed it in a mattress. And increased economy activity will often end up as extra revenue to the government. It’s a win-win situation. ---
**Author:** ![Folacin](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/folacin/32/3195_2.png) [@Folacin](https://boards.straightdope.com/u/Folacin)\ **Post date:** [September 7, 2012, 3:36pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/17 "2012-09-07T15:36:14Z")
> [@adaher](#): > > I don’t think that’s really right either because if we assume that the American economy is heavily dependent on buying American-made goods, an extra $500 doesn’t cut it. It will only enrich the agriculture sector(who are doing quite well right now), oil companies(okay, some employment there), and foreign manufacturers who sell products cheaply enough that you can spend $500 and buy a new TV or computer. > > I also don’t think any economists really know what the multiples are for different types of spending and tax cuts. But it’s the (admittedly unknown) multipliers that are important. If you give someone (even a non-millionaire) $10 million dollars, a lot of that is going in the bank. There is plenty of investment money sloshing around now, waiting on demand. But if you give everyone $500, they will likely spend it. The original money may ultimately end up in the hands of ADM, Exxon or Apple/Sony, but in the meantime, it pays wages to grocery store clerks, convenience store clerks, and Best Buy blue shirts. Those folks in turn will spend most of the money they received. Since something was purchased, it needs to be replaced, and a whole new tier of people receive some portion of the original $500. It’s the multiplier that makes it worthwhile. ---
**Author:** ![Gangster\_Octopus](https://avatars.discourse-cdn.com/v4/letter/g/a8b319/32.png) [@Gangster\_Octopus](https://boards.straightdope.com/u/Gangster_Octopus)\ **Post date:** [September 7, 2012, 3:37pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/18 "2012-09-07T15:37:12Z")
> [@Crafter\_Man](#): > > If you give people a tax cut, then they will do something with the money that otherwise would have gone to the government. _Anything_ they do with this money will end up helping other people (and thus the economy), either directly or indirectly. The only exception is if the money went overseas. Or if they stuffed it in a mattress. And increased economy activity will often end up as extra revenue to the government. It’s a win-win situation. Because the Government does nothing with the money? ---
**Author:** ![tim-n-va](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tim-n-va/32/3001_2.png) [@tim-n-va](https://boards.straightdope.com/u/tim-n-va)\ **Post date:** [September 7, 2012, 3:40pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/19 "2012-09-07T15:40:23Z")
Most of the arguements for cutting taxes for the “job creators” is that any money that they don’t pay in taxes will be partially spent creating jobs. The flip side is that if they have to pay more taxes, they will have to cut jobs. The problem with this is that taxes are paid by job creators on net profits so any salaries actually reduce the taxable part. The reality is that jobs are created when someone has confidence they’ll make more money by hiring more people. That is why a long term government spending plan is a great stimulus. If the Pentagon places an order for 1000 widgets, a company might try to squeeze that out with overtime. If the Pentagon says they want 1000 widgets per month for the next three years, the company will hire more people. Reasonably expectation of profit is the only job creation force. ---
**Author:** ![Folacin](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/folacin/32/3195_2.png) [@Folacin](https://boards.straightdope.com/u/Folacin)\ **Post date:** [September 7, 2012, 3:43pm UTC](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919/20 "2012-09-07T15:43:18Z")
> [@Crafter\_Man](#): > > If you give people a tax cut, then they will do something with the money that otherwise would have gone to the government. _Anything_ they do with this money will end up helping other people (and thus the economy), either directly or indirectly. The only exception is if the money went overseas. Or if they stuffed it in a mattress. And increased economy activity will often end up as extra revenue to the government. It’s a win-win situation. What do you think the government does with it? There isn’t a big mattress in Washington where tax revenues are stored. For every dollar they get, they immediately spend $1.10 (or whatever the deficit ratio is) on either goods and services or wages, which provides pretty much exactly the same sort of increased economic activity. You can argue that that is less efficient for the government to spend the money then for Joe Sixpack to do it, but it’s not the black hole that the right likes to pretend. And, quite frankly, if the money comes from people like me who are well off and saving in non-immediately productive ways (buying stocks/mutual funds does very little to stimulate the economy), then I’m pretty sure it’s much more stimulative. [Next page](https://boards.straightdope.com/t/what-evidence-that-cutting-taxes-on-the-rich-works-to-stimulate-economy/633919.md?page=2)