Rising Taxes Don't Sink Rich Boats
For decades, American politicians and economists have debated the merits of soaking the rich through taxes.Skip to next paragraph
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Now University of Chicago economist Austan Goolsbee has thrown an academic hand grenade into the debate. In effect, his work says that boosting taxes on the rich, as President Clinton and Congress did in 1993, worked. It raised revenues. It did no more damage to the economy than any other type of tax hike.
The rich play a key role in the United States economy. The top 1 percent of taxpayers provide almost 29 percent of federal personal income tax revenues. The wealthiest 1 percent of Americans owned almost 32 percent of net worth and 46 percent of financial wealth in 1992.
They have economic clout.
President Reagan was influenced by supply-side economists views that easing the tax burden on the prosperous would boost the economy - create a rising tide that lifts all boats. The rich would work harder, invest more.
In his first term, Congress cut the maximum federal income tax rate from 71 to 50 percent. In Mr. Reagan's second term, the rate fell further, to 28 percent. Both the economy and the stock market boomed, although subsequent studies have shown that the rich were the primary beneficiaries.
Mr. Clinton took a different view, that the rich weren't paying their fair share in taxes, and ran for office partly on that platform. So in 1993, Congress raised the marginal tax rate from 31 percent to 39.6 percent for income greater than $250,000 - still low, historically.
Conservative economists said the measure wouldn't raise revenues because the prosperous would take measures to avoid taxes and cut back on their efforts to bolster their businesses and their own incomes. They would trim savings and damage the economy.
Both rich and poor would suffer.
Goolsbee has found that well-to-do corporate executives did indeed react to the prospect of higher taxes when President Clinton was elected in November 1992. Many immediately cashed in their stock options in order to put that income into 1992 and get the lower tax rate. For example, Michael Eisner, the boss at Disney, cashed in $200 million in options.
Stock option income plunged in 1993.
But the economy and the stock market, again, boomed. And other forms of compensation, such as salary and bonus, weren't altered with the higher marginal tax rate. So over three or four years the executives sent more money to Uncle Sam, apparently unable to use whatever tax loopholes remain in the tax code.
Nor, after the huge Reagan tax cut in 1983, did the prosperous raise their work hours, find two other economists, Robert Moffitt of Johns Hopkins University, Baltimore, and Mark Wilhelm, Pennsylvania State University, University Park.
The three economists' findings were presented at a conference held by the University of Michigan Business School.
Joel Slemrod, top tax expert at the school, notes two implications of this work:
* A good chunk of the unexpected tax revenues that have helped wipe out the federal budget deficit, could disappear if the stock market tanks and executives don't cash in so many options.
* At some higher tax rate - say above 50 percent, the wealthy might work less, retire early, or move abroad. But so far, that has not happened, not at the current, relatively modest US tax rates.