Income Tax Changes May Not Boost Long-term Economic Growth, Study Finds
Washington, D.C., Friday, 24 October 2025.
Brookings Institution’s analysis challenges the belief that altering income tax structures boosts growth, urging policymakers to consider structure and funding over simplistic tax cuts.
Tax Reforms and Economic Growth: A Complex Relationship
Recent research by the Brookings Institution questions the widely held belief that income tax reforms inherently stimulate economic growth. Authors William Gale and Andrew Samwick argue that while tax rate cuts might encourage work, saving, and investment, these benefits are contingent on how the tax cuts are financed. If not accompanied by immediate spending cuts, such reforms could lead to increased federal budget deficits, potentially reducing national saving and raising interest rates [1].
Funding and Structural Design: Crucial Elements
The Brookings analysis emphasizes that the structure and funding of tax changes are critical to their economic impact. Without appropriate financing, tax cuts may inadvertently lead to negative outcomes such as increased deficits. Additionally, reforms that broaden the tax base while maintaining revenue levels can mitigate these risks but may also dampen the positive effects on labor supply and investment [1].
Policy Implications for Future Reforms
Policymakers are urged to consider comprehensive reforms that improve economic incentives, reduce distortionary subsidies, and avoid deficit financing. Such strategies, according to the Brookings study, are more likely to enhance the long-term size of the economy without sacrificing equity for efficiency. However, these reforms come with their own set of trade-offs, highlighting the need for balanced fiscal strategies [1].
Broader Economic Context and Upcoming Proposals
This analysis comes at a time when tax policy is under significant scrutiny. For instance, in the United Kingdom, Chancellor Rachel Reeves is considering tax hikes targeting wealthier individuals in the upcoming November 2025 Budget, specifically focusing on sectors like law and accounting. These proposed changes aim to ensure that those with the broadest financial shoulders contribute a fair share, reflecting a broader trend of targeting wealth in fiscal policy [2]. Meanwhile, the Ministry of Finance in Vietnam is poised to introduce new personal income tax laws by mid-2026, designed to expand the tax base and adjust income thresholds, marking significant steps towards more transparent fiscal policies [3].