Verify: Do tax cuts create economic growth?
This week, in Washington, Senate Republicans passed an outline of President Donald Trump’s $1.5-trillion dollar tax cut. Trump supporters say Trump tax cuts would be a "steroid injection" to boost the American economy. It's short on details, but the promise of tax cuts is that they stimulate economic growth. But is that true?
Right now all we've seen is a 9-page plan. The highlights are: a lowering of corporate taxes lowering of personal taxes -- particularly for the wealthy -- and the elimination of inheritance taxes.
Would those kinds of tax cuts be a shot in the arm to our economy? Economist James Galbraith is a professor at the LBJ School of Public Affairs at the University of Texas.
“Have tax cuts been discredited as a way to stimulate growth or is it a legitimate way to do that?” I asked Galbraith.
“I think, as a general formula for stimulating growth and getting a higher growth rate has been vastly oversold. So, yes, discredited is not an unfair term,” he said.
Basically, he's saying tax cuts are not a silver bullet for growth.
Let’s look back at recent history at two tax cuts and their impact on the economy. President Ronald Reagan had one in the early 80's after a major recession. There was an economic recovery that followed, but also, the national debt ballooned.
Galbraith actually worked as an economist in Congress at the time.
"We expected it would have a significant impact on stimulating economic activity and it did,” he said.
On the other hand, there's George W. Bush's tax cuts in the early 2000's. According to the non-partisan Center on Budget and Policy Priorities there is "no support for the claim that the tax cuts generated especially robust economic growth."
"They were much weaker in their effect. Much, much weaker,” Galbraith says. “And there's reason to believe, that looking at the situation now, it's not remotely similar to the Reagan cuts and much closer to the Bush context,” he added.
So, do tax cuts spur economic growth? This is kind of unsatisfying, but it depends.
Galbraith does say tax cuts are oversold as a driver for growth, and so much of the answer lies in the details of the cut. Details we don't have today.
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