Economics

Economists Have No Use for Republican Tax Cuts

They don't boost growth; they just add to deficits.

He said that, not me.

Photographer: Jabin Botsford/Washington Post/Getty Images

One popular misconception about economists is that they love tax cuts. This is certainly the impression one gets from listening to folks on the political left. Books such as James Kwak’s “Economism” chronicle historical episodes where economic theory was appropriated by a loose coterie of pundits, think-tank scholars and Republican political advisers to justify tax cuts for the rich.

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But when it comes to academic economists, the stereotype is dead wrong. As Republicans try once again to hand big tax cuts to wealthy Americans, it’s important to remember that professional economists are much more likely to side against them.

There is ample evidence for this. For example, in a 2013 paper, economists Paola Sapienza and Luigi Zingales compared surveys of top economists with surveys of the U.S. general public. Taxes were one of the policies they considered. Two-thirds of the general public said raising federal tax rates would increase revenues. That compares with 97 percent of economists who thought that a small increase in rates for top earners would boost revenues, while about 2 percent were undecided and less than 1 percent disagreed.

Why might economists tend to see higher taxes this way? Taxes go to fund many things -- public goods such as defense, research and infrastructure, redistributive spending like Medicaid and food stamps, and other programs that are somewhere in between, like Medicare and public schools.

In 2006, Daniel Klein and Charlotta Stern looked at a survey of a broader sample of economists, conducted in 2003. Although the survey didn’t ask about taxes specifically, it did ask about redistributive policies in general. Redistribution via the tax system garnered general support.

So economists do tend to like the idea of using the tax system to take from the rich and spend on helping the poor. But what do they think about the economic impact? In standard economic theory, taxes distort the economy by creating a difference between the price buyers pay for something and the amount sellers receive. When those prices don’t match up, the economy shrinks or it grows slower than it otherwise would. So most economists agree that taxation has some downside.

But that doesn’t mean the cost of taxation is large. If the economy doesn’t respond very much to the price distortions caused by taxes -- in econ jargon, if supply and demand are both inelastic -- then it’s safe to tax the rich and give to the poor. It’s an empirical question.

And the best evidence that economists can muster shows that income taxes -- i.e., what Republicans are always trying to cut -- don’t hurt the economy very much. Microeconomic estimates of something called the Frisch elasticity of labor supply -- or the amount that taxes discourage people from working -- are very low. That means that income taxes do only a very little to discourage people from working. The one exception is tax cuts for the poor and working class, which really do seem to encourage more work effort. But for the upper-middle class and rich, who bear most of the tax burden and who are usually the prime beneficiaries of Republican tax cuts, the effect is very small.

So according to economists’ best evidence, tax cuts probably won’t help the economy that much. That’s consistent with the recent performance of Kansas, which enacted big income-tax cuts but saw its economy underperform. It’s also consistent with the conspicuous failure of the George W. Bush tax cuts to produce rapid growth in the 2000s.

This also means tax cuts won’t improve the government's fiscal position. So-called supply-siders have been asserting for decades that tax cuts, by removing economic distortions and boosting growth, will partially or completely pay for themselves in terms of increased revenues and reduced deficits. Economists aren’t buying it. When the University of Chicago Booth Business School’s IGM Forum asked top economists in May 2017 whether they thought supply-siders oversold the effects of tax cuts, here was their answer:

Doubting the Supply-Side Thesis

Economists' responses to the following statement

Source: IMG Forum, University of Chicago Booth School of Business

And when the survey asked about President Donald Trump’s tax plan at the time, they responded thus:

Just Not Buying It

Economists' responses to the following statement

Source: IMG Forum, University of Chicago Booth School of Business

* Survey taken in May 2017 after release of initial tax plan. + No responses.

Yet despite the expert consensus that supply-side effects are modest at best, Republicans continue to insist that they are large. Treasury Secretary Steve Mnuchin publicly fretted that the Congressional Budget Office, which is responsible for projecting the fiscal impact of tax cuts, will fail to include enough dynamic scoring. Dynamic scoring is a euphemism for the large supply-side effects that academic economists generally don’t believe are real.

So if you ever see Republicans saying that their tax cuts are supported by economists, remember that most of those in the field line up against this sort of policy.

(Corrects third paragraph to indicate that the survey cited didn't say economists support higher taxes, only that they think higher taxes increase federal revenues.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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