Tax Reforms and Top Incomes

http://economistsview.typepad.com/economistsview/2017/04/tax-reforms-and-top-incomes.html

http://voxeu.org/article/tax-reforms-and-top-incomes

Enrico Rubolino, Daniel Waldenström 13 April 2017

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Our main finding is shown in Figure 1. It depicts the top percentile income share around the time of the reform in the countries in which the reform occurred, compared to the same income share in their respective ‘synthetic’ controls. While pre-reform top shares are almost identical, there is a notable divergence after the tax reform. Top shares in treated countries increased by between 15% and 30% more than in the synthetic controls. The effects were not short-lived – the gap remains for at least ten years in all cases.

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We also find that the progressivity effect differs among top groups. Figure 2 shows that earners in the top income decile that are below the top percentile were almost not affected by the progressivity reforms. By contrast, looking within the top percentile, the effects increase in size. The top 0.1 percentile share did twice as well from the reforms as the top percentile share did, taken as a whole.

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Tax reforms did not increase the size of the cake

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GDP per capita was not significantly affected by the tax reform treatments in any of the three countries that we studied. Likewise, we do not find any significant effect on the number of patents or tax revenues. Although these variables are aggregate, and therefore only offer a coarse estimate of the true effect, this analysis does not show large real income responses to reductions in progressivity.

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