Home > Business Cycles, Deficit Commission, Fiscal Cliff, Fiscal Policy, Taxation > Raising Tax Rates on the Rich: Some Empirical Evidence

Raising Tax Rates on the Rich: Some Empirical Evidence

John Cochrane is an economist in the business school at the University of Chicago. He maintains a blog which I highly recommend (check out The Grumpy Economist), a blog which contains articles using a lighthearted approach to the analysis of economics issues. This blog contains some empirical evidence on the response of rich taxpayers to an increase in their marginal income tax rate (MTR).

The evidence comes from the United Kingdom where the MTR was recently raised to 50 percent. The evidence is that, within a year of the increased MTR, the number of UK residents reporting a very high pre-tax income declined from 16,000 to 6,000 (see this post). You may recall that, in a previous article, I suggested that revenues to be raised from the rich from higher tax rates are overstated. This empirical evidence shows why those estimates are too high.

The rich tend to be smart (think Bill Gates), and they can afford first-rate tax advice. They also have the ability to change the timing of their income. For example, there are now reports in the press that dividend payments are being accelerated into the current tax year when dividends will be taxed at a lower rate compared to next year. Finally, the rich can always change their country of residence. What is surprising to an economist is how rapidly the rich seem to respond to a higher MTR. Usually, economists argue that it takes time for economic agents to respond to a shift in incentives for the simple reason that time is required to process new information. This empirical evidence reveals how quickly the rich can respond to new incentives.

The moral of the story is that increasing the MTR on the rich will generate considerably less revenue than is assumed by the federal government. The Laffer Curve (the notion that higher tax rates reduce tax revenue) is alive and well at least as far as the rich are concerned.

  1. March 10, 2013 at 10:41 PM

    Quality post. If only all bloggers put as much effort into their content!

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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