Wednesday, June 01, 2016

Tax hikes on the wealthy do not hurt economic growth

I suggest reading the whole article at the following link:

By Mark Thoma MoneyWatch June 1, 2016, 5:30 AM
Tax hikes on the wealthy: Good or bad for growth?

Conservatives have argued for decades that tax cuts are the key to economic prosperity. And the tax plan presumptive GOP nominee Donald Trump is pushing would cut taxes for the top 0.1 percent of earners by an average of approximately $1.3 million per year, embracing that conservative point of view.

On the other hand, Democrats such as front-runner Hillary Clinton take another approach. Clinton says she'll reform the U.S. tax code so that the wealthiest pay their fair share. The response from Republicans has been predictable: They argue that such a tax plan will lower growth and harm the economy.

Do the conservative arguments against tax increases have any merit? Or are they, as Democrats claim, a way to serve an ideological goal of smaller government and reward wealthy Republican donors? Let's take a closer look.


As Nobel Prize-winning economist Peter Diamond and John Bates Clark medalist Emmanuel Saez have noted, since the 1970s no clear correlation exists between economic growth and top tax-rate cuts across Organization for Economic Cooperation and Development countries.

As for the trickle-down argument, this claim falls apart when you examine what happened to the distribution of income after tax cuts for the wealthy enacted during the Bush administration. Income of those at the top went up substantially, with no corresponding gain for those lower in the income distribution.


Decreasing taxes did not increase economic growth, so why would increasing taxes to levels they've been at in the past be harmful? In addition, it's hard to believe that a reduction in expected aftertax income of, say, 10 percent from $10 million to $9 million, or even from $300,000 to $270,000, would cause someone to pass on the investment opportunity.


The number of small-business owners that would be affected by a tax increase on incomes over $250,000 is fairly small. For example, an analysis of President Obama's proposal in 2009 to increase the rates for those in the top two tax brackets would affect only 1.9 percent of small businesses.

Many of those who would be affected are investors in the businesses who play no role at all in day-to-day management. And they could always escape the tax completely by filing as corporations. You also have to wonder how many people would choose to give up their businesses if their incomes were only, say, $350,000 due to a tax increase.


No comments:

Post a Comment