![]() ![]() Second, we find that personal income tax cuts can benefit lower income groups, even if those at the bottom of the earnings scale do not directly receive a tax cut. Since we aim at obtaining better distributional outcomes while still preserving some modest upside to growth, we focus on financing the cuts with a shift from personal income taxes to consumption taxes, combined with an expansion of the earned income tax credit to protect the poor. Thus, tax cuts would need to be financed either through increasing the public debt, cutting spending, or by raising revenues from other taxes. Three key results emerge from our analysis.įirst, although we find that tax cuts provide a one-time boost to GDP, consumption, and investment, these effects are never strong enough to prevent a loss of revenue. In addition, and contrary to standard incidence analyses, our approach incorporates dynamics and forward looking behavior, which allows us to consider the medium-term effects of policy changes. We do so based on modern tools for quantitative macroeconomic analysis, relying on a model capturing salient features of the United States that are key for the question at hand namely, different types of households (differentiated by education level), different productive sectors (manufacturing and services) interlinked through a realistic input-output structure, and international trade. Our paper assesses the dynamic effects of lowering effective personal income tax rates on income distribution and the U.S. But how far can a tax cut really take you? Can a personal income tax cut boost growth? And if it does, can it boost it enough to not weigh on the budget? More importantly, will the benefits of the reform reach low and middle-income households? ![]() Our paper looks more closely at the notion that tax reforms-and individual income tax cuts in particular-can go a long way in solving these challenges. authorities have also mentioned tax policy as an important lever. In the latest economic assessment of the U.S. These trends have reduced the labor share of national income by about 5 percent in 15 years, have shrunk the middle class to the smallest share of the population in 30 years, and-aside from the immediate aftermath of the financial crisis-have resulted in the lowest potential growth rate since the 1940s.įinding solutions to these issues requires action in multiple areas, among them trade, education, and health. ![]() In the medium term, though, growth prospects are constrained by weak productivity growth, falling labor force participation, increasingly polarized income distribution, and high levels of poverty. economy in one of its longest expansions in history. The tax reform debate is unfolding, with the U.S. However, we find that lowering personal income tax rates does not raise growth enough to offset the revenue loss that is caused by the tax cut itself. Personal income tax cuts can help support growth and, if well targeted, can also help improve income distribution. ![]() lawmakers getting ready to rewrite the nation’s tax code have a fundamental question to answer: What are the priorities for tax reform? Do you want faster growth? Less income inequality? A tax cut that doesn’t increase the budget deficit? In a recent working paper, we find that, depending on how a tax cut is targeted, it is possible to make some progress toward the first two objectives. economy (photo: Ingram Publishing/Newscom) A recent IMF paper looks at the effects of lowering personal income tax rates on income distribution and the U.S. ![]()
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