An important and timely paper from Columbia University economist Karl Mertens finds that amount of income reported on tax returns is highly sensitive to marginal tax rates, and that the effect is mainly from changes in real activity not tax avoidance.
Mertens estimates “elasticities of taxable income of around 1.2 based on time series from 1946 to 2012. Elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups… . Marginal rate cuts lead to increases in real GDP and declines in unemployment.” Other recent research also shows that “higher marginal tax rates reduce income mobility” while eliminating higher tax brackets improves upward mobility.
Both Democratic candidates for the presidency, Sanders and Clinton, want to greatly increase marginal tax rates on high incomes and on realized capital gains. By contrast, all Republican candidates propose to reduce marginal tax rates.
Mertens’ research unambiguously predicets that economic growth would slow or stop under the Democrats’ proposed tax increases, but accelerate under Republicans’ tax reforms.