The latest CBO assessment of the impact of ARRA once again (here is the earlier evidence) highlights that tax cuts are among the least effective of fiscal stimulus measures. This assumes significance in view of the decision pending before the US Congress on whether to extend the Bush tax cuts beyond its expiration period at the end of the year.
In fact, even the higher estimates on tax cuts on higher income people and corporates, revealed fiscal multipliers less than unity. In contrast, direct government spending, transfers to states, local governments, and individuals ((such as increased food stamp benefits and additional weeks of unemployment benefits), yielded higher multipliers.
In an excellent recent post, Mark Thoma examined the evidence on the impact of the Bush-era tax cuts of 2001 and 2003. The Bush tax cuts were done in two phases - in 2001 the top statutory income tax rate was reduced from 39.6% to 33%, while in 2003 the tax rate on both capital gains and dividends was lowered to 15%.
I have blogged earlier that far from having any positive impact, the marginal income tax rate increases of 2001 adversely affected household incomes, unemployment rates, and deficits. There is a large body of evidence to show that capital gains and dividend tax cuts had little or no impact on stock prices and corporate payouts. Further, the tax cuts on capital gains and dividends has also been held responsible for the massive widening of income inequality in the US in recent years.