Friday, May 20, 2011

Taxing the Rich: Not so Bad for Jobs & GDP

In a survey of the current literature on ETI (Elasticity of Taxable Income, aka The Laffer Curve), Kevin Drum over at Mother Jones points out that the conservative myth that higher top-marginal tax rates cause lower productivity is not supported by research.
Last year I read a review of ETI research written by Emmanuel Saez, Joel Slemrod, and Seth Giertz. I'm not familiar with Gertz, but both Saez and Slemrod are pretty honest guys, so I figured their paper would provide an evenhanded look at what the ETI research indicates. Their conclusions were far from rosy. First, they suggested that the ETI literature of the past two decades varies so widely that it can't really be considered very reliable yet. Second, they make clear that incomes can decline for several reasons, and most of the reported income drops in the wake of tax increases are related to tax fiddling, not actual economic deterioration.
So the myth that if you raise taxes the rich will become less productive is just that. A myth, unsupported by empirical evidence.
[W]hen taxes go up on the rich, they do report lower incomes. But that's mostly because they're fiddling with the tax code to report lower incomes, not because they're actually earning any less.
 While the evidence is far from conclusive, one cannot make an affirmative claim that higher taxes net lower productivity (the "Galtian Hypothesis," if you will!).  In fact, there is some evidence that GDP is correlated to tax rate.  Higher top marginal rates lead to higher GDP.

Looking at the current state of effective federal tax rates for different income levels, our system is not progressive.

But historically, if you look at times when our tax rates were more progressive, you get better GDP growth.

So the next time you hear one of our Galtian overlords telling us not to tax the rich because it'll cost jobs, you know they're lying to you.

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