Posted by AzBlueMeanie:
Economists Emmanuel Saez and Thomas Piketty argue that higher taxes will not discourage the wealthy from working harder or slow the economy. Higher Taxes Won’t Discourage Wealthy From Working Harder - Bloomberg:
“Top 1 percent earners now make 20 times the average, while they made only 10 times the average in the 1970s,” Saez, winner of the John Bates Clark young economist award in 2009, said in an e-mail. “If they worked hard then, they should continue working hard today, even if they are taxed at 50 percent.” The top federal tax rate is now 35 percent.
The two economists’ work is of more than just academic interest. President Barack Obama’s former budget director, Peter Orszag, has said their research on income inequality “helped to point the way for the administration in its pledge to rebalance the tax code.”
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“The idea that we need to pay people many millions of euros per year to get them to work harder is just crazy,” Piketty said in a telephone interview.
He and Saez, a professor of economics at the University of California-Berkeley, agreed in a November 2011 paper that the rich do behave differently when their taxes are raised. They pursue financial strategies to reduce their taxable incomes and bargain for higher compensation, instead of cutting back on how much they work and save or becoming less entrepreneurial.
Peter Diamond, who won the 2010 Nobel Prize in economics, also sees little evidence that raising rates on the top 1 percent of income earners -- households making about $350,000 or more a year in 2010 -- would restrict growth.
“The overwhelming likelihood is that the revenue- maximizing federal tax rate is somewhere in the 50 to 70 percent range,” said Diamond, a professor at the Massachusetts Institute of Technology in Cambridge. “If you are reluctant to overshoot, well okay, you can only go up to 50 percent, which I like to refer to as the Reagan tax rate." (Ronald Reagan championed an across-the-board tax cut soon after he became president in 1981 that lowered the top rate to 50 percent from 70 percent.)
The economy actually grew faster in the 30 years before that tax cut than it did during the following three decades, according to Diamond and Saez. Gross domestic product per capita advanced at an average annual 2.2 percent rate between 1950 and 1980, compared with 1.7 percent between 1980 and 2010, their calculations show.
Internationally, advanced economies that have reduced top tax rates the most since 1975 haven’t shown a tendency to grow faster than those that cut less, Piketty, Saez and Stefanie Stantcheva, an economist and Ph.D. student at MIT, found in the November 2011 paper.
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Saez said increases in top rates should be coupled with steps to close loopholes and broaden the tax base to limit the avoidance efforts Feldstein worries about.
Capital-gains taxes should be raised as well, said Saez, a French and U.S. citizen. That would discourage business leaders from trying to take more of their compensation in shares, rather than salary, to avoid paying higher income-tax rates. The top U.S. rate on long-term gains is 15 percent.
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Saez and Piketty have faced criticism for their research on income inequality. Using tax returns, the two academic economists concluded that the top 1 percent of U.S. earners have more than doubled their share of income during the last half century, to about 20 percent in 2010 from less than 10 percent in the 1970s.
The research says more about fluctuations in earnings reported for tax purposes in response to changes in the tax code than it does about inequality, Cato Institute’s Reynolds said. [but of course]
Another critic, Scott Winship, said he has become less skeptical of Saez and Piketty’s work as other studies show income differences widening -- albeit perhaps not to the extent the academics do.
“The general trend is still toward increasing inequality,” said Winship, a fellow at the Brookings Institution in Washington.
The Congressional Budget Office said in an October report that the share of income received by the top 1 percent grew from about 8 percent in 1979 to over 17 percent in 2007.
In its calculations, the Washington-based CBO takes account of government transfer payments, primarily from Social Security, and company-paid health-insurance benefits, neither of which Saez and Piketty consider.
Even after those adjustments, the rapid growth of income for the top 1 percent remains “a major factor” contributing to growing inequality, the CBO report said.
A new study from assistant research professor Jeffrey Thompson at University of Massachusetts at Amherst's Political Economy Research Institute argues that even when the government imposes higher taxes on wealthy people, most of them carry on with their lives as they did before. Raising Taxes On The Rich Won't Change Their Behavior: Study:
They don't pick up and move to states where the tax rates are lower, the study claims. They don't cut back on their hours at the office in a way that might cause economic growth to slow and they seem just about as likely to invest money in new business ventures.
Basically, the report suggests that when the rich pay more a bit more in taxes, the economy doesn't really suffer at all.
Thompson isn't the first to reach this conclusion. Analysts and financial professionals generally agree that raising tax rates on the affluent is unlikely to have much of an effect on their spending and investment patterns. As recently as last month, the National Bureau of Economic Research released a study arguing that taxes have little bearing on the kinds of consumer decisions that cause the economy to move.
Such research only seems to bolster the arguments of people like Warren Buffett, the billionaire financier who has repeatedly called for a tax code that would impose higher taxes on the wealthy.
It's an idea that can hardly be called unpopular. President Obama included a like-minded measure in his latest budget proposal, and proposals to tax the rich more have earned considerable approval among both the general public and the rich themselves.
"What the wealthy pay in taxes seems to have a direct bearing on this: A recent analysis from the National Priorities Project found that tax breaks for the richest 5 percent of Americans are costing the U.S. Treasury about $11.6 million every hour."