Corporate Tax Cuts and Economic Growth

In the course of researching our analysis of Proposition 24, which would reverse three recent business tax breaks, we’ve come across two recent studies of note, and re-read an older monograph, that deserve a special mention. The first by Princeton economist Alan Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System, and Mark Zandi, Chief Economist of Moody’s Analytics, estimated that corporate tax rate reductions resulted in the least “bang for the buck” of options considered for stimulating the national economy. Each dollar of revenue lost due to a corporate tax rate reduction resulted in a $0.32 increase in economic growth, while a dollar spent on public infrastructure resulted in a $1.57 increase in GDP, and a dollar spent on increased food stamp benefits resulted in a $1.74 increase in GDP.

The second, by Center on Budget and Policy Priorities’ researcher Michael Mazerov, reviews the research on the economic impact and effectiveness of corporate tax reductions and concludes that “Corporate income tax cuts are unlikely to have a positive impact on a state’s rate of economic growth or the pace at which it generates private-sector jobs.”

The third, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, by Washington College economist Robert Lynch examines the arguments made by advocates for tax cuts and the different approaches used to evaluate the impact of business tax incentives. The Lynch monograph is a “must read” for anyone seeking to understand the economic underpinnings of arguments over the relative impact of tax cuts and public services on economic growth.  Lynch concludes that, “An analysis of the relevant research literature, however, finds little grounds to support tax cuts and incentives – especially when they occur at the expense of public investment – as the best means to expand employment and spur growth.”

It is always a pleasure to come across well-reasoned, well-written, and fact-based policy papers. These are three that I, for one, would highly recommend adding to your fall reading list.

— Jean Ross