“Do we have any historical evidence that lowering tax rates, particularly among the richest strata, generates economic growth, as the Republicans always predict? Has this ever worked?”
— A reader
The answer is “no.” As Congress tackles “tax reform,” we really don’t have conclusive historical evidence of the relationship between tax rates and economic growth. To be sure, studies abound, but they are of two distinct types that — at least superficially — contradict each other.
The first approach compares tax rates with individual behaviors that should be good or bad for economic growth. Do lower taxes stimulate entrepreneurship and business investment? The answer, say some of these studies, is “yes.” Lower taxes encourage pro-growth behaviors; higher taxes do the opposite. The economy’s overall growth is assumed to benefit or suffer.
It’s this approach that the Trump administration touts in proposing that the top corporate tax rate be cut from 35 to 20 percent. The result will be a surge of business investment, which in turn will lift the wages of U.S. workers, says Kevin Hassett, chairman of President Trump’s Council of Economic Advisers.
As companies invest more in computers, software and other technological advances, workers become more productive. Because they’re more valuable, their wages will rise. Hassett has predicted — controversially — that enactment of Trump’s corporate tax cut would result, over perhaps a three- to five-year period, in wage gains of $3,000 to $7,000 for households with the median income ($59,000 in 2016). A $3,000 wage increase would represent a 5 percent gain.
Be skeptical, cautions the second type of study. Rather than examine the effect of taxes on individual behaviors (say, entrepreneurship), it compares tax rates with the overall growth of the economy (gross domestic product). Do lower tax rates cause faster GDP growth? One prominent…