The Reality of Raising Taxes at the Top, Part 2: Would Tax Increases Affect Work Effort?
Posted by: Chye-Ching Huang
Posted in: 2001/2003 Tax Cuts, Businesses, Congressional Action, Deficits and Projections, Federal Budget, Federal Tax, Individuals and Families, Taxes and the Economy
The first installment in this series on how tax increases at the top might affect economic growth explained that while high-income people reduce their taxable income in response to tax hikes, that’s more because they adopt tax avoidance strategies than because they work, save, or invest less. Nevertheless, opponents of raising taxes at the top claim that doing so would discourage high-income taxpayers from working, and so harm the economy.
The evidence shows, however, that changes in tax rates don’t substantially affect high-income people’s decisions about how much to work. As tax expert Len Burman recently told Congress, “Overall, evidence suggests [high-income Americans’] labor supply is insensitive to tax rates.”
Here’s why. A marginal tax rate increase may encourage some taxpayers to work less because they will get to keep less of each dollar they earn. But some people will choose to work more, in order to make as much money (after taxes) as they did before the tax increase. The evidence suggests that these two opposing responses largely cancel each other out.
Some groups, such as married women and older workers, do respond to tax rate changes with big changes in their work hours, but that’s not true generally for those at the top.
Our next installment will look at how tax increases on high-income people might affect saving and investment.