I’m not naive enough to think that any particular study will change minds, but when the bulk of the research unambiguously tells us that lower tax rates are better for economic performance, I think (or at least hope) that it may have some impact on government officials.
That’s why I’m particularly interested in some new research by Cornell University’s Karel Mertens.
Here are some key findings from Mertens’ study, beginning with some observations on existing research.
To what extent do marginal tax rates matter for individual decisions to work and invest? The answer is essential for public policy and its role in shaping economic growth. The strand of the empirical literature that uses tax return data, surveyed in Saez, Slemrod and Giertz (2012), finds that incomes before taxes react only modestly to marginal tax rates and that the response is mostly situated at the very top of the income distribution.
So what does this mean? A lot depends on how one defines “modestly,” though it’s worth noting that even very small changes in growth—if sustained over time—can have big impacts on prosperity. That, in turn, has a significant effect on government finances.
And I have no objection to the assertion that upper-income taxpayers are most sensitive to changes in tax rates. After all, people like me who rely on wage and salary income don’t have much opportunity to alter our compensation in response to changes in tax rates.
But upper-income taxpayers get most of their compensation in the form of business profits and investment returns, and this gives them substantial control over the timing, level, and composition of their income. So it’s quite understandable that their taxable income is quite sensitive to changes in tax rates.