| The question of raising taxes on high-income individuals at the top of the income distribution remains controversial and continues to generate passionate debate among economists, lawmakers, and the public. This debate is particularly heated in the United States, where the growing concentration of income since the 1970s has become a major issue.1 The Occupy movement that began in New York City in 2011 and quickly spread to many major cities around the world is simply one illustration of the scope of public concern over rising inequality. The recent success of the bestselling book Capital in the Twenty-first Century by Piketty (2014) demonstrates that these concerns have been sustained. High-income taxpayers—the rich—are often a prime target of policy when more tax revenue is needed. However, significant uncertainty surrounds the consequences of taxing the rich, the so-called job creators. There is virtually no evidence on the economy-wide effects of imposing higher burdens on the rich to guide policy. The purpose of this article is to provide empirical evidence on this simple question: Does imposing higher taxes on high-income taxpayers help or hurt job creation? Surprisingly, this important question has received scant attention in the empirical tax literature. Our work is informed by two strands of research. One focuses on the rich and examines how tax changes affecting them influence individual outcomes like taxable income, labor supply, or interstate migration. Goolsbee (2000), for example, uses detailed compensation data on corporate executives to evaluate the taxable income response to increased marginal tax rates in 1993. He finds a significant decline in taxable income among executives at the top of the income distribution in the short run, but very little responsiveness in the long run. Goolsbee concludes that the observed decline is more of a short-run shift in the timing of compensation rather than a permanent change in taxable income. Slemrod (2000) presents a review of the literature regarding the behavioral responses of the affluent when they are taxed more heavily (Piketty, Saez, and Stantcheva, 2014; Saez, Slemrod, and Giertz, 2012). Our work differs from these studies in that our interest is in the economy-wide consequences of taxing the rich. The second strand of the relevant fiscal policy literature examines the impact of general tax hikes (or tax cuts) on the macroeconomy. Most economists agree that, in general, tax increases have negative effects on macroeconomic measures like gross domestic product (GDP) via the conventional tax multiplier. However, there is little agreement on the tax (or spending) multiplier’s magnitude, Favero and Giavazzi (2012). The endogenous nature of fiscal policy changes creates a challenge in empirically isolating the true impact of tax changes in economic activity. |
