Do Tax Cuts Work? A Look at the Data

15 April Annual Nightmare

The question of whether tax cuts "work" remains one of the most enduring and contentious issues in economic policy. Advocates assert that reducing tax rates stimulates investment, fosters wage growth, and encourages innovation, thereby generating broader economic prosperity and potentially enhancing tax revenue through an expanded economic base.

Conversely, critics argue that the benefits of tax cuts are disproportionately distributed to the affluent, and that such measures often result in unsustainable budgetary deficits.

The rationale behind federal tax cuts is relatively straightforward. Lowering the tax burden enhances a politician's electoral appeal—one long-time liberal confided that he frequently voted for Republican candidates due to the direct financial benefit he experienced. From an economic perspective, tax cuts inject capital into the economy, fostering growth.

However, the central challenge lies in balancing the resource requirements for essential public services with the need for economic expansion. This raises another complex issue: the definition of "essential services" is highly subjective, and consensus on what constitutes these services remains elusive.

What’s often missing from this discourse is empirical grounding. Fortunately, we have a recent case to examine: the Tax Cuts and Jobs Act of 2017 (TCJA).

What Did the TCJA Do?

The law reduced income tax rates across the board:

• 15% dropped to 12%

• 25% to 22%

• 28% to 24%

• 33% to 32%

Of course, it also reduced the corporate tax rate which seemingly unnerved the political left. What they tend not to acknowledge is that reducing corporate tax rates from 35% to 21% brought it in line with corporate tax rates around the rest of the industrialized world. The result was many businesses returned to the U.S. and created jobs.

Another fact typically omitted from complaints about the tax cut was that the child tax credit was expanded, reducing the tax liability for families with dependents. These changes were designed to increase disposable income, incentivize business investment, and bring home corporate profits held overseas.

So, What Happened Next According to Federal Data?

1. Federal Revenue Increased

Despite initial projections of revenue loss, total federal receipts rose from $3.3 trillion in FY 2017 to $4.0 trillion in FY 2018, and to $4.5 trillion by FY 2022 (excluding the anomalous COVID year). Source: U.S. Treasury, Financial Report of the U.S. Government, FY 2022

2. Incomes and Wages Grew

• Median household income increased from $62,626 in 2017 to $64,324 in 2018, a 2.7% gain. Source: U.S. Census Bureau, Income and Poverty Report, 2019

• The Employment Cost Index showed wages and salaries for civilian workers rose by 3.0% from Q4 2017 to Q4 2018. Source: Bureau of Labor Statistics

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3. Broad-Based Benefits

Although critics claimed the TCJA primarily helped the wealthy, the largest percentage reduction in taxes paid occurred in the bottom half of income earners—over 16%.Further, tax relief averaged $1,500 to $3,000 for many middle-income households. Source: Joint Committee on Taxation, Distributional Effects of the TCJA

4. Corporations Did Share the Gains

Few news outlets reported how high-profile companies used their tax savings to increase wages, provide bonuses, provide expanded childcare, extend maternity leave, or expand a host of other benefits

Here's a list of some of the major, well-known U.S. companies that paid out bonuses or increased pay as a result of the savings due to the tax reform bill:

Source: USA Today, Adam Shell, Jan 11, 2018

Company	Bonus	# employees getting a bonus
AT&T	$1,000	200,000
Alaska Airlines	$1,000	19,000
American Airlines	$1,000	130,000
Bank of America	$1,000	145,000
BB&T	$1,200	27,000
Comcast	$1,000	100,000
Fifth Third Bank	$1,000	13,500
JetBlue	$1,000	21,000
Nationwide	$1,000	29,000
PNC Financial	$1,000	47,500
Sinclair Broadcast	$1,000	9,000
Southwest Airlines	$1,000	55,000
Travelers	$1,000	14,000
U.S. Bancorp	$1,000	60,000

5. By The Way, Who Really Pays Those Corporate Taxes?

Much of the confusion surrounding the distributional effects of tax cuts stems from the disproportionate tax burden already borne by high earners. In 2018:

• The top 1% paid 40.1% of all federal income taxes.

• The top 10% paid over 70%.

  Source: IRS Data Book, 2022

  
  

Conclusion: A Matter of Finding the Curve's Inflection

The TCJA experience suggests that tax cuts can increase both private income and public revenue—at least under certain conditions. But no one denies that a threshold exists: cut too much, and the revenue loss outweighs growth; tax too heavily, and incentives collapse.

The fundamental policy challenge is empirical, not ideological: locating the “knee in the curve”—that critical inflection point beyond which additional tax cuts no longer yield commensurate economic benefits.

The debate should not be whether tax cuts work in principle—clearly, they can. The better questions are: when do they stop working, and what are the economic indicators that would help us adjust in time?

All the "fair share" talk is simply a red herring—okay, simply nonsense used for emotionally charged political palaver.