What is the effect of taxation on job creation and economic growth?

Question

It is often said (particularly by politicians) that tax cuts stimulate job creation and economic growth. How economically sound is this idea? I'm looking for any peer-reviewed academic sources that either support or refute this view. Please supply references.

Answer 1

Theoretically it should be broadly neutral, because a tax cut transfers income from government to consumers without adding to or subtracting from national income. In practice though, bear in mind that (a) some govt expenditure is labour intensive (warships are not, but education and some of healthcare is) (b) in many countries, consumer expenditure is more import-intensive than govt expenditure so the job benefit leaks abroad.

Answer 2

In macroeconomics texbooks, you can see that the IS-LM framework is in line with what you said. Any tax cuts or increase in government spendings that make the IS curve shift outward, causes a rise in GDP. An economy which grows creates jobs. The logic behind this theory explained in the texbooks, can be explained as follows: A corporate tax cut increases the profitability of companies which may grow more easily and demand more labor. The tax cut on individuals may increase the disposable income of households, which will raise their consumption, and again increase firms' profitability and labor demand.