Conservative Mythbusters: Taxing the Rich Is Bad!

"Oh my! Whatever will the job creators do? More taxes? How will they survive???"

Those poor job creators!  They’re so put upon… So many regulations… So much to worry about…  Oh dear.  How will they survive?  We must enable them to create jobs by cutting their taxes and eliminating public spending to clear the field and stop “crowding out” the work of our titans of industry!

Or not.

A lot if [these papers] also reminded me of this: you know all those arguments we’re always having about supply-side, trickle-down economics?  Like every day in the Congress, on the campaign trail, and on cable TV?  Well, scholars have actually looked at this stuff and come up with consistent and compelling answers.  So, if we can just find our way back to The-Land-Where-Facts-Matter, we might be able to make some smart choices around tax policies.

More below the fold.

And what are those “smart choices?”  Here’s a starter list.

  • Taxable income and revenue. Opponents of raising the taxes that high-income households face often point to findings that high-income taxpayers respond to tax-rate increases by reporting less income to the Internal Revenue Service (IRS) as evidence that high marginal tax rates impose significant costs on the economy.  However, an important study by tax economists Joel Slemrod and Alan Auerbach found that such reductions in reported income largely reflect timing and other tax avoidance strategies that taxpayers adopt to minimize their taxable income, not changes in real work, savings, and investment behavior.  While such strategies entail some economic costs, these costs are relatively modest.  Moreover, policymakers can limit high-income taxpayers’ ability to respond to increases in tax rates by engaging in tax avoidance activity — and also enhance the efficiency of the tax code — by broadening the tax base, as discussed below.
  • Work and labor supply. The evidence shows that changes in tax rates that fall within the ranges that policymakers are debating have little impact on high-income individuals’ decisions regarding how much to work.  As Leonard Burman, former head of the Urban-Brookings Tax Policy Center (TPC), recently testified, “Overall, evidence suggests [high-income Americans’] labor supply is insensitive to tax rates.”[2] A marginal rate increase may encourage some taxpayers to work less because the after-tax return to work declines, but some will choose to work more, to maintain a level of after-tax income similar to what they had before the tax increase.  The evidence suggests that these two opposing responses largely cancel each other out.
  • Saving and investment. Some claim that tax increases on high-income people — in particular, increases in capital gains and dividend tax rates — depress private saving rates and investment.  But as Professor Joel Slemrod has written, “there is no evidence that links aggregate economic performance to capital gains tax rates.”[3] Similarly, the Congressional Research Service (CRS) has reported that most economists find that reducing capital gains tax rates would have only a small — and possibly negative— impact on saving and investment.[4] Although tax increases on high-income individuals might reduce their saving, if the revenue generated is devoted to deficit reduction, the resulting increase in publicsaving is likely to more than offset any reduction in private saving.  CRS concludes, “Capital gains tax rate increases appear to increase public saving and may have little or no effect on private saving.  Consequently, capital gains tax increases likely have a positive overall impact on national saving and investment.”[5]
  • Small business. The evidence does not support the claim that raising top marginal income tax rates has a heavy impact on small business owners: a recent Treasury analysis finds that only 2.5 percent of small business owners fall into the top two income tax brackets and that these owners receive less than one-third of small business income.  Moreover, even those small business owners who would be affected by tax increases on high-income households are unlikely to respond by reducing hiring or new investment.  As Tax Policy Center co-director William Gale has noted:[6]

“[T]he effective tax rate on small business income is likely to be zero or negative, regardless of small changes in the marginal tax rates.  This is for three reasons.  First, small businesses can expense (immediately deduct in full) the cost of investment.  This alone brings the effective tax rate on new investment to zero, regardless of the statutory rate.  Second, if they can finance the investment with debt, the interest payments would be tax deductible, making the effective tax rate negative.  Third, they can deduct wage payments in full, so the marginal tax rate should have minimal impact on hiring.”

In addition, a review of the research finds little evidence for the common assertion that small businesses are responsible for the majority of job creation in the United States or that tax breaks for small businesses generally — as distinguished from start-up ventures — are effective at stimulating jobs or growth in Gross Domestic Product (GDP).

  • Entrepreneurship. CRS finds that “An extensive empirical literature on [the relationship between income tax rate increases and business formation] is mixed, but largely suggests that higher tax rates are more likely to encourage, rather than discourage, self-employment.”[7] One reason is that taxes may reduce earnings volatility, with the government bearing some of the risk of a new venture — by allowing tax deductions for losses — and receiving some of the returns.  Further, there is little evidence that the current preferential tax rates for capital gains and dividends substantially stimulate investment in new ventures.
  • Growth and jobs. History shows that higher taxes are compatible with economic growth and job creation: job creation and GDP growth were significantly stronger following the Clinton tax increases than following the Bush tax cuts.  Further, the Congressional Budget office (CBO) concludes that letting the Bush-era tax cuts expire on schedule would strengthen long-term economic growth, on balance, if policymakers used the revenue saved to reduce deficits.  In other words, any negative impact on economic growth from increasing taxes on high-income people would be more than offset by the positive effects of using the resulting revenue gain to reduce the budget deficit.  Tax increases can also be used to fund, or to forestall cuts in, productive public investments in areas that support growth such as public education, basic research, and infrastructure.

In a 7 part series over at Presimetrics, economist Mike Kimel surveys the historical data and finds that higher top-marginal tax rates (i.e. tax rates on the wealthiest Americans) produced periods of the highest GDP growth.  The data looks like this:

The highest growth rates are correlated with times where the top marginal tax rate is between 62.5% and 67.4%.

Like dominoes, the conservative myths come tumbling down, one after the other…

17 comments to Conservative Mythbusters: Taxing the Rich Is Bad!

  • Ed Heinzelman

    The overpaid CEOs aren’t job creators…in their role of CEO their companies may hire but they don’t spend their own hard earned cash hiring…Aaron Rodgers isn’t a job creator yet his salary puts him in the 1%…Warren Buffett isn’t a job creator, he simply buys and sells companies, Bill Gates was a job creator whatever decades ago he started Microsoft, but once they IPO’d, nope, MS might be but Mr. Gates isn’t! Tax them!!!

    The job creators are those small time local businesses or the bright inventors or entrepreneurs starting out who need investment capital and customers…spend the money there and support them…but if they hit the big time and become as rich as Zuckerberg, TAX ‘EM!

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  • Of course Aaron Rodgers is a job creator. He fills the stands with people, creating jobs for others to feed them, clean up after them etc… and he fills the seats in front of TV’s, creating jobs for TV producers, makers and sellers of products, commentators, TV techs and so on. Would those jobs exist without AR? Yes, most of them would, but as a star player, he adds value and customers, particularly on TV. He adds value to the Packers and the NFL. That is why he deservedly is paid large sums of money, because he creates wealth for people in terms of jobs and enjoyment, excepting Bears fans, for whom he creates misery. I could make the same argument for most CEOs, WB, BG etc…

    Regarding your post Phil, you should take a look at your titles. Nobody and I mean nobody is suggesting that taxing the rich is bad.

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    • By that broad definition, anyone who commits any type of economic activity can be defined as a “job creator.” When I walk into a convenience store and buy a hot dog and a Coke, I’m a “job creator,” right?

      You do realize you’ve just made a Keynesian demand-side argument for economic prosperity, right? Job creation is a function of demand and not supply. I’m just not sure you noticed… So I figured I’d point it out.

      Regarding your post Phil, you should take a look at your titles. Nobody and I mean nobody is suggesting that taxing the rich is bad.

      Now I’ll be the first one in line to point out a straw man argument, but I think you need to update your news sources… That’s a pretty dumb statement. There are literally hundreds of examples of one conservative or another complaining that you can’t tax the so-called “job creators.”

      Here’s an example. Here’s another. And another… Need I go on?

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      • Phil, I read the first two of your links and realized that neither one were advocating a 0% tax on the rich so I passed on your third link. My point regarding your titles is I think they are not accurate in so far as it implies that people are actually advocating a 0% tax rate on the rich. If someone argues that taxing the rich is bad, then clearly they are advocating NOT taxing the rich. Of course nobody is advocating any such thing. Mine is a modest, good faith suggestion not to oversell your point in your title, that is all.

        Are you creating a job by ordering a hot dog and a coke? Sure. Trade is good. You created wealth for both parties in that by some small margin, you are happier with a coke and a hot dog than you were with the $2.50 in your pocket. The other guy is wealthier and happier by some margin, perhaps because he earned $.50 as a result. It is a good lesson for those who insist on misunderstanding the role of freedom and capitalism. Both parties are happy, indeed a bit wealthier, and nobody was harmed, except the pig. Its all good. But sell enough Coke’s, ie make lots of people happy/wealthy, and the left will turn on you as an oppressor, a greedy 1%er etc… it makes no sense.

        Not sure of your point with the Keynesian reference. I can demand hot dogs and a coke all day and it won’t make it happen. Someone will have to want to meet that demand, ie supply them, and would only do so if it was a profitable endeavor.

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        • I’m not going to split verbal hairs with you. If you can’t recognize an amusing hyperbole, then I can’t help you.

          It is a good lesson for those who insist on misunderstanding the role of freedom and capitalism. Both parties are happy, indeed a bit wealthier, and nobody was harmed, except the pig. Its all good. But sell enough Coke’s, ie make lots of people happy/wealthy, and the left will turn on you as an oppressor, a greedy 1%er etc… it makes no sense.

          Uhhhh, what? That’s just silly… Economics isn’t about “happiness,” it’s about how to optimally distribute limited resources so that the whole system grows and benefits everyone. Taxes are a key part of that system. If the top earners are earning a disproportionate share of the income growth, the system needs to be adjusted through taxation and income transfers. This is one of the reasons Scandinavian countries like Sweden and Denmark are so successful. They recognize that everyone, from rich to poor, are in it together. The Chinese get this too…

          And you seem to have a very bizarre sense of what Keynes advocated. I was merely making the point that you were making a strong demand-side argument. That might get you drummed out of the Milton Friedman School of Republican Economics if you’re not careful… Keynes main contribution to economics (though not his only one) is that modern industrial economies are driven by demand, not by supply. There is nearly always ample supply, but without demand for what industry has to offer, the economy tanks. This is why, when you look at what constitutes GDP, government represents the “spender of last resort” when the private sector demand dries up. What’s happening with the whole austerity bullshit in Europe is a classic case. Austerity (government spending slowdown) during a time of recession will only exacerbate the recession. Again, it’s a demand-side problem.

          I suggest you read more about Keynes and get back to me.

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          • If modern economies are demand driven, why can’t I buy a personal flying or, better yet, a time travel machine? I also want free health care, a big house on a lake, and some French maids. I demand it, now make it happen!

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            • You’re not understanding what is meant in economics by demand. You’re thinking of it in the sense that “I demand a pony!” or “Where are the flying cars?

              But I’m using it in the more formal economic definition. In economics, demand

              refers to the quantities of a product that purchasers are willing and able to buy at various prices per period of time, ‘all other things being equal

              Elements of the Law of Demand As Melvin and Boyes note the law of demand is defined as:

              1. The quantity of a well-defined good or service that:
              2. People are willing and able to buy.
              3. During a particular period of time.
              4. Decreases/increases as the price of that good or service rises/falls
              5. All other factors remain constant.

              Melvin and Boyes (2010)

              You plot it on a demand curve.

              In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together.

              Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price (the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price) and the equilibrium quantity (the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market. In a monopolistic market, the demand curve facing the monopolist is simply the market demand curve.

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            • Perhaps you’d believe the CEO of International Paper

              Businesses aren’t investing in the United States because of a lack of consumer demand, International Paper CEO John Faraci said Friday.

              “I think this was all about consumer spending and demand. You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand,” he said …

              “Productivity has obviously been very good, so we’re creating more capacity with less resources. But at the end of the day, this is really about responding to demand, whether it’s automobiles or packaging products we make for a whole variety of industries and end users

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  • @Denis “Nobody and I mean nobody is suggesting that taxing the rich is bad. ” Ummmmm yeah except for the entire Republican party. Want evidence? At the federal level they voted against a bill that would have extended the tax cuts for everyone except the rich..

    PS I’m pretty sure you could raise the top tax bracket a couple of percentage points and Aaron Rodgers would still continue to play hard and win games…

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    • Indeed…

      “Overall, evidence suggests [high-income Americans’] labor supply is insensitive to tax rates.” A marginal rate increase may encourage some taxpayers to work less because the after-tax return to work declines, but some will choose to work more, to maintain a level of after-tax income similar to what they had before the tax increase. The evidence suggests that these two opposing responses largely cancel each other out.

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  • Incidentally Phil way too many of those pesky facts and figures!:)

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    • I know… I know… I have this compelling need to use data to make points. It constantly gets me in trouble with the conservatives. The don’t know what to do with data when it’s shoved in their faces.

      Oh well…

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      • Actually you do use too much data. It is a technique to muddle the obvious, that is, people of course react to high tax rates in all sorts of ways. We all know this. I could find all sorts of data to support my point but I don’t see the point of getting into a data war. You do know of course that there is data to support my argument that people react to tax rates. If you want it, go get it.

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        • Actually you do use too much data.

          **snicker**

          You reminded me of my favorite scene from Amadeus:

          Emperor Joseph II: My dear young man, don’t take it too hard. Your work is ingenious. It’s quality work. And there are simply too many notes, that’s all. Just cut a few and it will be perfect.
          Mozart: Which few did you have in mind, Majesty?

          So which data would you have me cut, Denis? :-)

             1 likes

        • FWIW, Denis, your logical fallacy sin is the Sin of Personal Incredulity

          Because you found something difficult to understand, or are unaware of how it works, you made out like it’s probably not true.

          Complex subjects like biological evolution through natural selection [or economics!] require some amount of understanding of how they work before one is able to properly grasp them; this fallacy is usually used in place of that understanding.

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