Experts disagree about exactly how personal income tax rates affect individual economic behavior and macroeconomic outcomes. This lack of consensus complicates the design of fiscal policy. To address this debate, this article uses an empirical perspective and finds that tax cuts—in the form of reductions either in the marginal tax rates or on the overall tax burden—are associated with increases in economic activity. Furthermore, reducing tax rates on the top 1 percent as well as on the bottom 99 percent leads to higher economic activity. Nevertheless, these results do not imply that lower taxes benefit society. Such a normative statement requires economic modeling that, among other things, considers the medium- to long-run economic consequences for income inequality and welfare.
This article appeared in the Third Quarter 2021 edition of Economic Insights. Download and read the full issue.