POSITIVE IMPACT OF TAX CUTS ON LOW-INCOME PEOPLE
Evaluating the effects of tax cut policies and clarifying the impact of tax cuts on the economy and society is an insightful discussion in today’s academic institution. According to income division, high-income people receive a greater amount of tax reduction because they have higher income and more consumption, and they benefit more from tax reduction. But in fact, although the low-income people receive a relatively small amount of tax reduction, they may change their work or life because of the tax reduction. The positive significance of this may be more beneficial from the perspective of individuals and families, and it also makes the benefits of tax cuts more eminent.
In the context of global tax cuts, the question of who benefits from tax cuts and the positive effects of tax cuts have not fully been answered. The former question relates to the redistribution effect of tax policy adjustment, that is, whether the tax cut policy widens or narrows the income gap between people; the latter question relates to the economic and social consequences of tax cuts, that is, the channels through which tax cuts change people’s behavior, which in turn affects economic and social development. As the largest economy in the world today, and one of the countries that implemented tax reduction policies earlier, the changes in the US tax system have attracted widespread attention. From the Reagan Tax Reduction Act (1981 to 1986), to the current reduction of personal and corporate income tax policies, the US Federal Government has launched more or less tax reduction plans for four consecutive times. At the same time, as a federal state, the US states have their own tax arrangements.
In order to evaluate the effects of tax reduction policies that have lasted for many years, and to determine the impact of policy implementation on individuals and even the macro economy, many research results have been released. In March 2019, a professor at the Department of Economics at Princeton University and a researcher at the US Bureau of Economic Research Owen Zidar, published a treatise named “Who Reduces Taxes” in March 2019. His research found that tax reduction policies affect economic activities by affecting people with different incomes. The paper uses the official tax data of the US Bureau of Economic Research to assess the impact of changes in the US tax system after World War II (1950-2011) by region. The main conclusion is that, compared with high-income people (income ranked in the top 10%), tax cuts have a greater impact on low-income groups (income ranked in the bottom 10%), and are mainly reflected in tax reduction policies that promote employment and economics.
The biggest highlight of this paper is that it has more accurately identified the employment and growth effects of tax cuts and is part of the “supply-side” reform. This is different from the “demand-side” stimulus-tax cuts increase from people’s disposable income, which in turn promotes related research on consumption.
In fact, for a long time, some scholars worried that tax cuts would mainly benefit middle- and high-income groups because they have higher disposable income. Under the same tax reduction policy, they will benefit more. However, some scholars believe that although low-income groups may receive less tax cuts than high-income groups, they are more sensitive to income increases. The increase in income from tax cuts will effectively improve the welfare of low-income groups and allow them to spend more. At the same time, the income increase is expected to stimulate the willingness of low-income groups to find employment. The consumption growth and employment increase brought about by these series of changes will become the driving force of economic development.
Both of the above views are justified, but they also lack more conclusive evidence. The difficulty of research is to identify the mechanism of the impact of tax cuts. Because there are many reasons for inducing changes in people’s behavior, it is not possible to simply evaluate the policy effect by comparing the behavior changes before and after tax reduction. In addition, if the research object is the entire country, then the implementation process of tax reduction policies in different regions must also be considered. In order to solve the problem of the mechanism of action, Professor Zida’s research used the pre-tax income of the year before the implementation of the tax reduction policy as a benchmark. First subtract this year’s taxable amount from the previous year as the after-tax income of the previous year (actually obtained); then subtract this year’s (after tax reduction) taxable amount from this benchmark as the after-tax income of this year (Equal to the assumption that income will not change within two years). This avoids the improper practice of using the difference between the actual income after tax reduction and the actual income before tax reduction as a measure of the effectiveness of tax reduction. In order to analyze the effects of tax reduction policies in different regions, the paper first draws the actual tax reductions in the US states. For the top 10% of income groups, the tax rates of Connecticut, California, New York, and Pennsylvania fell between 11.5 and 15.5 percentage points, while Maine, Iowa, Montana, South Dakota and other tax rates have fallen between 3.9 and 6.8 percentage points. The tax cut differences between regions provide a basis for comparison to identify the effects of tax cuts. The ingenuity of the research is also to construct an adjusted gross income indicator AGI (Adjusted Gross Income) based on how much income is sorted.
Next, it is necessary to sort out the three main conclusions presented in the paper in detail.
First, from the state level, low-income people (10% after income ranking) are more prominent than high-income people (10% before income ranking) in terms of employment growth and economic activity after tax changes. For every 1 percentage point reduction in the state tax rate, the employment rate of low-income people will increase by 3.4 percentage points and will last for two years. Correspondingly, tax cuts are only likely to increase the employment rate of high-income groups by 0.2 percentage points. The above results also appear in the growth of state GDP (gross domestic product), the increase in wage income and the increase in residents ’disposable income. In short, high-income people are less sensitive to tax cuts.
Second, there are many welfare policies implemented at the same time as tax reductions. These policies may affect the identification of tax reduction effects. To this end, the study considers that in addition to tax reductions affecting residents ’income, subsidies for families to raise children and poverty The impact of social assistance systems such as temporary family assistance, supplemental nutrition assistance programs, supplementary guaranteed income and medical assistance, as well as the impact on oil price fluctuations, interest rate fluctuations and regional development trends in different economic environments. The study found that the above factors do not have a substantial impact on the research results, and tax cuts are still the main reason for promoting employment for low-income people.
Third, the study found that the impact of changes in tax rates on economic activity is reflected in both employment and consumption levels. For each low-income group (10% after income ranking), when the state tax increases by 1 percentage point, the employment participation rate will decrease by 3.5 percentage points, and the working hours will also decrease by 2 percentage points. Correspondingly, no effect of tax increase on employment of high-income groups (the top 10% in income ranking) has been found. From a consumption perspective, the impact of changes in tax rates on low-income groups is also more significant. However, changes in consumption are caused by changes in the employment participation rate and employment time because the lower employment participation rate and less labor time lead to lower income, which in turn reduces consumption. It can be said that the change in tax rate affects the consumption of low-income people in the labor market and thus affects consumption, and ultimately affects economic growth.
The final controversy is the most controversial. Because most macroeconomic policies, especially fiscal policies, start from the “demand side” by increasing government expenditures, it drives total social demand. But Professor Zida’s research concluded that the post-war tax reduction policy of the United States is a typical example of promoting economic development from the “supply side”, and the reduction of fiscal revenue rather than increased fiscal expenditure embodied in it is the main force driving economic growth. At the same time, the mode of boosting employment through tax cuts and promoting growth can be described as a double benefit, and there is even an increase in social welfare in addition to economic effects.