Monday, May 23, 2011

On hissy fits and taxing the rich

Do tax hikes cause high income earners to work less? For some, it's an article of faith that increasing taxes on rich people will yield less revenue because they'll have collective hissy fits and find ways to refuse to pay, legally or not. This was the background to George W. Bush's tax cuts programme -- though there's little evidence to suggest it achieved its objectives.

For true devotees of tax cuts for the rich, a large literature on what academics like to call the elasticity of taxable income (ETI) provides some empirical evidence backing the idea that rich people are more sensitive to tax than other members of society are.

That isn't an argument for feeding them endless tax breaks, in the vague hope this might incentivise them to get out of bed in the morning. TJN is not the first to challenge the widely held view that the best way to incentivise poor people is to pay them less, while the best way to incentivise rich people is to pay them more . . . We share J. Paul Getty's view that "Money is like manure. You have to spread it around or it smells."

Kevin Drum explores this issue in his latest blog on the Mother Jones site, and concludes that while higher taxes might indeed upset a few (but not all) billionaires and millionaires, "the rest of the economy would do just fine." He cites the work of economists Emmanuel Saez, Joel Slemrod, and Seth Giertz, who reviewed the ETI literature in 2010 and concluded:

"....While there is compelling U.S. evidence of strong behavioral responses to taxation at the upper end of the distribution around the main tax reform episodes since 1980, in all cases those responses [are related to] timing and avoidance. In contrast, there is no compelling evidence to date of real economic responses to tax rates....If behavioral responses to taxation are large in the current tax system, the best policy response would not be to lower tax rates, but instead broaden the tax base and eliminate avoidance opportunities to lower the size of behavioral responses."

Well we won't be arguing with that conclusion. Read Drum's blog here.

Hat tip: James McLaren


Blogger Physiocrat said...

Academic discussion. People look at their after-tax income. To all intents and purposes the "income tax" might as well be a payroll tax levied on employers.

I had a boss when working for a London borough who would never apply for promotion as it would have taken him into the higher rate tax band, leaving him with little reward for a lot of extra responsibility, time and trouble. It was not worth his while, he had sensibly concluded.

He was excellent at his job and would have been ideal for a post at the most senior level. The loss was the council's. But it would have had to pay him an increase of several grades to tempt him. In effect, it was the employer who was paying the cost, in this instance, the taxpayer. A nice example of churning.

3:53 pm  

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