Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth & Employment

40 Pages Posted: 19 Jul 2012 Last revised: 19 Feb 2013

Owen M. Zidar

University of Chicago - Booth School of Business

Date Written: February 2013

Abstract

This paper investigates how tax changes for different income groups affect macroeconomic activity. Using historical tax return data from NBER’s TAXSIM, I construct a measure of who received (or who paid for) postwar tax changes for each income and payroll tax change that Romer & Romer (2010) classify as exogenous. At the national level, I aggregate tax changes for all taxpayers in the the bottom 90% and the top 10% of AGI and relate these aggregates to output, employment, and consumption growth. At the state level, I construct Bartik instruments for state tax shocks using national tax changes and each state’s share of high income taxpayers. If tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners. I find that the negative relationship between tax changes and real GDP growth over a two year period is almost entirely driven by tax changes for lower income groups. The empirical relationship between tax cuts for the top 10% percent and job creation is negligible in magnitude, statistically insignificant, and much weaker than that of equivalently sized tax cuts for the bottom 90%.

Keywords: tax cuts, heterogenous agents, fiscal policy, paradox of thrift, business cycles

JEL Classification: E32, E62, H20, N12

Suggested Citation

Zidar, Owen M., Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth & Employment (February 2013). Available at SSRN: https://ssrn.com/abstract=2112482 or http://dx.doi.org/10.2139/ssrn.2112482

Owen M. Zidar (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/omzidar/

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