Since 1980, when President Reagan won election promising prosperity through tax cuts, the average income of the vast majority—the bottom 90 percent of Americans—has increased a meager $303, or 1 percent. Put another way, for each dollar people in the vast majority made in 1980, in 2008 their income was up to $1.01.Those at the top did better. The top 1 percent’s average income more than doubled to $1.1 million, according to an analysis of tax data by economists Thomas Piketty and Emmanuel Saez. The really rich, the top 10th of 1 percent, each enjoyed almost $4 in 2008 for each dollar in 1980.
Growth? Tax reformers often promise that their proposals will favor economic growth. But there is little evidence that this has ever happened in the past. In principle, this should be no surprise. The long-run potential for economic growth depends on the growth rate of our population, the cost of natural resources, technological progress and the rate of business investment. It is very difficult for any tax reform to change these factors materially. Business investment can sometimes be stimulated by tax favors in the short-run, such as the investment tax credit. Sometimes, this is desirable policy. But a one-time increase in investment does not yield a long-term increase in the rate of growth.
Despite the tradition of hype that suffuses this topic, the most any tax law change can reasonably promise is modest improvement in economic conditions in the fairly short run. History also teaches that most of that effect comes from increasing purchasing power when it is too low – that is, from the Keynesian effect and not the supply-side effects. Tax law changes do not supply magic bullets for financial crises, nor for a period of slow technological innovation or rising costs of energy.