Do Tax Cuts Work?

Do tax cuts work? 

Are they good for workers, families, and businesses? 

Are they good for the economy? 

The right says yes—as long as the government can fund its core functions.

The left says sometimes, but only if they’re targeted toward low- and middle-income earners. Tax cuts for the “wealthy,” they say, are always bad.

This gets to the heart of the dilemma: what is the right level of taxation?

Tax too little, and there won’t be enough money for the basics—like the military, police, fire, courts, roads. 

Tax too much and nobody is motivated to work. If nobody works, there is nothing to tax. 

Like Goldilocks’ porridge, a good government tries to get it just right.

So, can tax cuts create more prosperity and give the government the revenue it needs?

If only we could study a real-life example.

Oh wait, we can:

The Tax Cuts and Jobs Act of 2017, also known as the Trump tax cuts. 

What exactly did they do? 

They reduced the income tax rate for virtually everyone by 2 to 4 percentage points.

So, if your income tax rate was 15%, it is now 12%. Before, 25%, now 22%. Before 28, now 24. Before 33, now 32.

If you were a salaried employee, you got a tax cut.

Small business owner? Tax cut.

Corporations? Tax cut, from 35% — one of the highest in the world — to 21%. That led to another benefit: billions of dollars corporations held overseas in countries with lower tax rates came back to the United States.

The bill also increased the child tax credit, further lowering household tax liability.

Did these tax cuts work?

Let’s examine the numbers.

The average tax cut for working and middle income taxpayers ranged from $1,500 to $3,000.

The bottom half of earners saw the largest reduction in the amount of taxes they paid — over 16%.

Conclusion: Virtually everyone’s taxes went down. Blacks, whites, Hispanics, Asians, men, women, people with a college degree, and people without one.

So why do critics of these tax cuts claim they only helped the rich? Here, we have to apply some common sense: when you reduce tax rates, even a little bit, on someone already paying a lot of taxes, they will see big savings.

For example, if Jeff Bezos gets a 1% tax cut, that number is going to be huge. But for a family making a middle-class income, the number clearly will be much smaller. This is just math.

Here's what is not in dispute: high earners pay most of our taxes — by a lot. In 2021, the top 10% paid 76% of federal income taxes, and the top 1% paid 46% of taxes!

Maybe, instead of denigrating these people, we should be thanking them. They finance a truly disproportionate amount of government services and benefits. 

But but but… critics will insist, what about those greedy corporations that pocketed the tax cuts and didn’t pass them on to their employees? 

First, you should be aware that corporations don’t actually pay these taxes. We—the consumers—do. Corporations build them into the price of the goods and services we buy.

And, they did pass tax cuts on to their employees. 

In the year after the tax cuts took effect, median household income rose by $5,000, and wages grew 4.9%. 

Let’s look at some of those big bad corporations:

Chipotle invested over one-third of its tax savings in cash and stock bonuses and enhanced benefits like parental leave and short-term disability for its 71,000 employees.

CVS increased starting pay to $11 an hour, paid for health insurance premium increases, and created a paid parental leave program.

Lowes gave thousands of hourly employees bonuses of up to $1,000, 10 weeks of paid maternity leave to full-time workers, and up to $5,000 in adoption assistance. 

Employees at Wells Fargo, Wal-Mart, Costco… this list goes on… enjoyed similar benefits.

Ok ok ok… but all these tax cuts cost the government a lot of money, right?

Wrong.

Since 2018, when federal revenue was $4.2 trillion, the government has collected more money year after year, except in the COVID lockdown year of 2020. In 2022, Uncle Sam took in over $5.2 trillion.

Lower taxes, more money in your pocket, more money in the US Treasury. 

That sounds like a win-win-win to me.

How many more wins before we say the obvious: tax cuts work.

My question is this: if lower taxes lead to higher income, higher wages, and higher government revenue, why would anybody want higher taxes? 

Do you have an answer for that?

I’m Patrice Onwuka, Director of the Center for Economic Opportunity at Independent Women, for Prager University.