Tax cuts should go to the lowest income earners. While they will pay less to the tax man— they will still be paying FICA, property, and sales taxes. They spend all their extra cash. More money will flow through to all levels of the economy. This will grow GDP, because consumer expenditures comprise 75% of all GDP activity.
In Figure 1, the rightmost column shows that as income increases (going down the column) the percent of income spent on consumption declines. In fact, the top 0.1 earners consume only 9.1% of their income, while the middle quintile spends 93% of their income.
This relates to tax cuts intended to boost the economy. Tax cuts delivered to the middle class and those with lower incomes will spend nearly all of their newly freed income, contributing to GDP growth, while persons in the upper income brackets spent considerably less of their retained incomes, contributing less to GDP growth.
As we have seen over prior tax cuts that favored the rich, their new cash ends up in the financial markets, inflating stock prices and their wealth rather than accelerating GDP.
Corporations will see greater profits. Corporations will have more money to invest and grow their business. Everyone prospers.
Growth in the wealth of the wealthiest has not jump started the economy. Since the Great Recession, 93% of the income growth went to the top 1% of earners. Their deployment of additional money has been anemic for the overall GDP, for the entire nation. They consume only 20.8% of their income on consumption, which flows directly into GDP.
Figure 2. More money that you can spend
The Top-Down Problem
Their extra income goes into the financial sector, not directly to new plants or productive sectors that contribute to GDP. The money stays in the financial markets, contributing significantly to highs despite anemic GDP and corporate profit rather than to growth in GDP.
Current Tax Proposal
The current tax cut bill is estimated to increase the federal debt by $1.5 trillion over 10 years. Let’s put that number into context. If we gave the bottom 75 million earners (rather than the richest) a tax cut that sums to that amount, each of those employees and small business owners would get a tax break of $2,000 per year for 10 years.
As of September 2017, there are 127 million people working full time. The 75 million, getting the tax cut, would be the entire bottom 3 quintiles, the 60% of the labor force with the lowest wages.It reaches into the middle class.
As figure 1 shows, those 75 million beneficiaries spend over 95% of the money. The tax cut would be immediately consumed and reflected in GDP.
The real economy would grow. Everyone would prosper.
Bottom Up, not Top Down.