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Taxing the Rich More—Evidence from the 2013 Federal Tax Increase

Thursday, November 3, 2016 10:08
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Emmanuel Saez:

Taxing the rich more—evidence from the 2013 federal tax increase: One of the most contentious aspects of the tax policy debate in the United States today is the proper level of taxation of the rich. In the current presidential election contest, Hillary Clinton proposes to increase taxes on the rich while Donald Trump proposes to cut taxes on the rich. This policy decision is particularly important because the concentration of income at the top is extremely high. …

Progressive taxation historically is the most powerful tool to reduce income concentration. The classic counter argument is that higher top tax rates might discourage economic activity among the rich. In a recent paper, I analyze the effects of the 2013 federal income tax increase on the behavior of top income earners to cast light on this issue. …

After President Obama was re-elected in early November 2012, it was virtually certain that top income tax rates would go up in 2013. For the rich, shifting $100 of income from 2013 to 2012 saves $9 in taxes for capital income (and $6 for labor income), which means the rich had strong incentives to accelerate their incomes into 2012 to benefit from the lower 2012 tax rates and avoid the higher 2013 tax rates. …

This retiming response is large—income earners in the top 1 percent shifted about 10 percent of their income from 2013 into 2012. Lost government tax revenues, however, were modest as income shifted into 2012 still were taxed at the 2012 rates, which were about three-quarters of the 2013 tax rate. …

I estimate that only about 20 percent of the projected revenue increase from the 2013 tax hike is lost due to the behavioral responses over the medium term. Second, by itself, the 2013 tax increase will not be sufficient to curb the extraordinarily high level of pre-tax income concentration in the United States.

These findings echo the findings of earlier work analyzing the 1993 Clinton era tax increase, which also generated short-term retiming of top incomes into 1992 but did not prevent top income shares from surging in the mid-to-late 1990s. It is also striking that the best growth experience for the bottom 99 percent of income earners over the past 25 years took place in the mid-to-late 1990s and between 2013 and 2015—after tax increases on the rich. This suggests that taxing the rich more does not have detrimental effects on the broader economy; quite the contrary.

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