New report: Trickle-down Dries Up

October 26, 2017

By Ali Mickelson

“Trickle-down” economics is an archaic theory that suggests that providing tax cuts for the wealthy eventually seeps down to middle-class Americans and creates jobs, raises wages and increases economic development. Despite extensive evidence that this type of tax policy is unsuccessful, conservative lawmakers are still advocating for the elimination or reduction in income individual income taxes as a way to spur economic growth.

The most recent and visible example of the failure of trickle-down policies occurred in the Kansas, where Governor Sam Brownback dramatically reduced personal income tax rates, claiming that these changes would “act like a shot of adrenaline into the heart of the Kansas economy.”

Unfortunately, the opposite was true. Promises of immediate economic improvement failed to materialize and state revenues plummeted, resulting in cuts to services, delays to road projects, and underfunding in schools. Recognizing that the tax cuts had created a financial and budget crisis, a group of bipartisan lawmakers reversed the tax cuts earlier this year.

A new analysis by the Institute on Taxation and Economic Policy (ITEP) further proves that tax cuts aren’t the solution to thriving economies. The report, titled “Trickle-Down Dries Up” finds that states with the highest income tax rates actually experience higher economic growth than states without individual income taxes. Furthermore, states with higher individual income tax rates have higher income growth rates, increased employment and fairer tax systems.

ITEP picture 1The study looks at the nine states with the highest top marginal income tax rates and compares them to the states with no personal income taxes. Examining ten years of data shows that states levying the nation’s highest income tax rates performed better in economic growth rates, per capita and disposable income growth and employment than states without an income tax.

The analysis also shows that states without personal income taxes rely more heavily on revenue from regressive sales and excise taxes, which has resulted in higher tax rates for low-income families, and lower overall tax rates on the wealthy.

ITEP notes that while tax policies contribute to economic growth, states also need tax revenue to provide good public schools and to support public health, public safety and infrastructure. All of these things fuel economic growth. Cutting personal income taxes is an ineffective and single-minded approach to a complex issue.

Carl Davis, director of research and author of the report summarizes the findings, stating “while proponents of income tax cuts often point to the states without personal income taxes as a model to strive for, these states have actually been less successful in fostering economic growth than states with relatively high-income taxes. The track record of states not levying income taxes suggests that the rhetoric of economy-boosting income tax cuts does not match the reality.”

For more information and to read the full report, click here:

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