Among the frequently-heard arguments against raising taxes on the rich is that they’ll find ways of avoiding the increase, so it won’t bring in much additional income. A side argument is that these so-called job creators will be so spavined by the additional burden that they’ll stop playing their role as drivers of economic growth, so everyone will suffer.
UC Berkeley economist Emmanuel Saez has subjected both these assertions to empirical analysis, and his conclusion is: wrong on both counts. He does find support, however, for one other hypothesis, which is that raising taxes on the rich won’t do much to stem wealth inequality.
Saez’s findings appear in a working paper for the Washington Center for Equitable Growth, where he’s a member of the steering committee. The paper also appears in shorter form on the center’s website. His conclusions are drawn from studying how the 2013 federal income tax increase affected the behavior of the top 1% of income earners, its principal targets.
As Saez reminds us, the 2013 hike in top income tax rates was the largest since the 1950s, outstripping an increase in the top rate in 1993, during the Clinton administration. It had two components, both aimed at the 1%: a surtax on high earners designed to help pay for the Affordable Care Act, and the expiration of the 2001 tax cuts for the wealthy implemented by President George W. Bush.
The average combined income, corporate and payroll tax rate on the top 1% rose by 5 points, from 29% in 2012 to 34% the following year, according to the Congressional Budget Office. The impact on their top marginal rate — what they pay on the last dollars they collect each year — was more pronounced. That rate rose by about 9 percentage points on capital income such as capital gains and dividends, and by about 6 points on wages and salaries.
Saez determined that, in the very short term, the targets of the tax increase reacted exactly as one would expect, and as tax advisors counseled publicly and privately: They accelerated the income as much as possible into 2012 to beat the 2013 rate hikes. Saez points to “a clear surge in reported top incomes in 2012,” with the share of total income claimed by the 1% rising to 22.8% in 2012 from 19.6% in 2011. That was “the largest year-to-year increase over the past 25 years,” he writes. The share dropped sharply to 20% in 2013.
“That unusual pattern,” Saez writes, “is due to behavioral responses to taxation, in the form of income retiming.” Every $100 shifted forward by a year into 2012 saved $9 in taxes for capital income and $6 for wage and salary income. Most of that was due to retiming the realization of capital gains, which can be taken at any time entirely at the option of the taxpayer — it’s the country’s only voluntary tax, as USC tax expert Ed Kleinbard says. Saez estimates that the top 1 percent shifted about 10% of their income from 2013 into 2012.
Was this a blow to government coffers? Not so much, Saez observes. After all, the shifted income still was subject to tax in 2012, albeit at lower rates. He reckons that income shifting cost the government no more than 20% of its projected gains from the higher rates in 2013, “which makes the 2013 tax increase an efficient way to raise extra revenue.” It’s worth noting, moreover, that the ability to reduce taxes by shifting income largely disappeared after 2012, since the higher rates remained in effect after 2013.
Saez also reiterates an old finding 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 — following tax increases on the rich. “This suggests that taxing the rich more does not have detrimental effects on the broader economy,” he writes; “quite the contrary.”
Disappointingly, however, Saez throws cold water on the notion that raising taxes on the wealthiest Americans — or at least the 2013 increase — significantly reduces wealth inequality. After 2013, he finds, the share of national income collected by the top 1% continued to increase, reaching 22% in 2015. That means the reduction in pre-tax incomes for those taxpayers was only temporary. “The 2013 tax increase will not be sufficient to curb the extraordinarily high level of pre-tax income concentration in the United States,” he concludes.
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