NCPA - National Center for Policy Analysis

Some Economists Say Tax Cuts Won't Increase Work Effort

February 15, 2001

One rationale being given for the Bush tax plan to reduce tax rates is that it increases incentives to work and invest. But "history strongly suggests that such incentives are modest at best and are usually overwhelmed by other factors," says Jeff Madrick, the editor of Challenge Magazine.

Levels of taxes and growth rates in advanced nations aren't correlated, claims Madrick, saying that:

  • In the post-World-War-II period, the American economy, for example, did best in the 1950s and 1960s when the maximum tax rate on some forms of income was as high as 90 percent, reduced to a still-high 70 percent in 1964.
  • Maximum tax rates were reduced from 70 to 50 percent and eventually to 28 percent during the Reagan administration; but despite a few years of rapid growth after the harsh 1982 recession, productivity growth on balance failed to improve and savings rates fell in the Reagan years.

Why would this be so? In an article on the work habits of the well-off, economists Robert A. Moffitt and Mark Wilhelm found that high-income men did not work more hours in response to the especially generous tax cuts in the 1980s.

However, economists like Martin Feldstein of the National Bureau of Economic Research and Lawrence Lindsey, President Bush's top economic adviser, say well-off Americans raised their incomes during those years by adopting strategies other than working more.

Source: Jeff Madrick (Challenge Magazine), "Tax Cut Plans Are Clever Politics but Unwise Fiscal Policy," Economic Scene, New York Times, February 15, 2001.

 

Browse more articles on Tax and Spending Issues