A second reason is that tax cuts have an effect on aggregate demand. Rich people save most of their money, so when you cut their taxes they tend to stick the extra money in the bank. But if you give poor or middle-class people a tax cut, they tend to go out and spend it, which increases demand via a multiplier effect. That tends to raise employment.
So if you want to boost the economy through tax cuts, give them to the middle class and the poor rather than the rich. That raises an interesting question -- how do you cut taxes for the poor? Low earners pay little if any income tax, but they do pay payroll taxes and sales taxes.
A large portion of payroll taxes in the U.S. go to pay for Medicare. The U.S. could cut payroll taxes and shift Medicare funding toward income taxes. At the state level, shifting from sales taxes to income taxes could have similar effects.
Another way to cut taxes for the poor is to raise the level at which welfare benefits are phased out, or make phase-outs more gradual. When benefits disappear as income rises, it acts like a tax, because it effectively takes away some of each additional dollar earned. Raising the income cap for government benefits, or making the benefits disappear more slowly, acts like a tax cut for the poor.
Higher earners certainly are not going to like the idea of shifting more of the tax burden onto their shoulders. But it’s probably good for the economy, and for keeping the working class working.
This Bloomberg View column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.