Budget & Tax

Tax cuts and opportunities for happiness

July 8, 2022

Curtis Shelton

What does the research say about income taxes and economic growth? This was the question examined by Tax Foundation senior policy analyst Timothy Vermeer in a new policy paper (“The Impact of Individual Income Tax Changes on Economic Growth”) summarizing “the academic literature that empirically studied the relationship among the macroeconomy, taxes, and individuals’ behavioral responses to rate cuts or rate increases both in the United States and abroad.”

All but one of the studies compiled by Vermeer in his literature review showed a positive correlation between lower income tax rates and GDP growth, increased chances of upward mobility, and wage growth. The evidence of lower taxes' positive effects on economic activity has been clear for some time. There is a reason 25 states have lowered their income tax rates since 2012. Low-income-tax states have been gaining population at a much faster rate than high-tax states. That trend has only increased since the pandemic started in 2020.

Often the fight over tax rates revolves around trying to prove whether lower taxes spur economic growth without reducing government revenue. But this debate misses the point. The real impact from lower tax rates comes from the opportunities produced by the lower rates.

No one who raises a child aspires for that child to end up on welfare as an adult. That isn’t a value statement about those on welfare or those who provide public services. It is simply a fact that every parent wants their children to find a passion or skill that they have the opportunity to pursue. A job is the best outlet for that.

It is not just about making more money. The upward mobility created by lower taxes provides more access to work and gives more people a chance to discover that they have something valuable to offer. That can be directly through their work by marrying a passion with a job, or through the resources that job provides. Those resources can help someone pursue their own passion or help someone they love to pursue theirs.

American Enterprise Institute president emeritus Arthur C. Brooks reminds us (“A Formula for Happiness”) that happiness is built on four main pillars: faith, family, community, and work. Lower taxes are not a panacea for all social problems, but they unequivocally help people find more work. That work helps people become more stable family and community members and offers a chance at finding a purpose for their lives.