WASHINGTON – President Barack Obama’s 2013 tax increases for wealthy Americans neither slowed their income growth nor hurt the economy, according to a study that taps into a key debate in the current presidential race.
The top 1 per cent of earners managed to increase their share of the nation’s income at about the same pace after their taxes were raised as they had before, according to the study , released Thursday by Emmanuel Saez, an economics professor at University of California, Berkeley.
That outcome suggests that wealthier Americans did not respond to the higher taxes by either working less or saving less, as many economists often say will happen.
Saez and his frequent collaborator, Thomas Piketty, have helped fuel a contentious debate over income inequality with their research into income gains by the wealthiest Americans. Like their previous work, the new study uses recently released tax data from the IRS.
The findings are relevant to the presidential campaign, in which the two major nominees have put forth radically different ideas for taxing wealthier households. Donald Trump has proposed steep tax cuts that would benefit primarily the richest 1 per cent. He maintains that his plan would accelerate economic growth by spurring more spending and investment.
Hillary Clinton wants to sharply raise taxes for the wealthy and use the resulting revenue to help pay for infrastructure projects and financial aid for higher education. Those steps, she argues, would quicken growth by making shipping, commuting and travel more efficient and raising workers’ skill levels.
Most independent analyses have concluded that Clinton’s tax hikes would modestly slow the economy. With any new income subject to higher taxes, economists typically assume that richer Americans would work and save somewhat less. Lower savings would mean that the wealthy would invest less in stocks and corporate bonds, leaving companies with less money to borrow to buy more equipment.
Yet Saez said his research suggests that the 2013 tax increases for the wealthy didn’t slow the economy, at least so far.
“The 2013 tax hike had no discernable negative effect on economic growth,” Saez said. “Clinton’s tax hikes are similar in spirit, just going further, and hence it’s likely that the effect on economic growth will be minimal.”
Other data points appear to support Saez’s conclusion: Employers added 5.8 million jobs in 2014 and 2015 — the strongest two-year growth since the late 1990s.
And income for the typical household jumped last year by the most since records began in 1967, according to the Census Bureau. That increase followed years of stagnation.
Still, the nonpartisan Tax Policy Center concluded last month that Clinton’s tax plans would result in a small hit to the economy, leaving the gross domestic product 0.2 per cent smaller in 2018 than it would otherwise be.
Other economists foresee a larger impact: The Tax Foundation, a conservative think-tank , estimates that Clinton’s tax plan would leave the economy 2.6 per cent smaller over the next decade.
In 2013, Obama allowed previous tax cuts for the wealthy to expire. In doing so, he allowed the top income tax rate to rise from 35 per cent to 39.6 per cent. Taxes on dividends and capital gains also rose. And a tax on investment income, included in the Affordable Care Act, took effect that year. Altogether, it was the largest tax increase on the wealthy since the 1950s, Saez said. Americans earning less than $250,000 were unaffected.
In response, Saez estimates that the richest 1 per cent shifted about 10 per cent of their 2013 income into 2012, largely by taking profits on their investments earlier than they otherwise would have.
That shift temporarily lowered the share of national income earned by the top 1 per cent to 20 per cent in 2013 from 22.8 in 2012. But by 2015, their share had rebounded to 22 per cent from 19.6 per cent in 2011, before the tax increases were on the horizon. That increase is roughly as occurred from 2009 to 2011, the study found.
Saez said his conclusions echo research on the effects of President Bill Clinton’s tax increase for the wealthy in 1993, which was followed later that decade by sharp income increases for the wealthiest Americans. Yet middle and lower-income households also enjoyed solid gains.
“It is striking to note that the best growth years for the bottom 99 per cent since 1990 have taken place in the mid-to-late 1990s and since 2013, shortly after increases in top tax rates,” Saez wrote.
In previous research with Piketty, Saez found that higher taxes on the wealthy in the 1960s and 1970s did reduce their share of income. So why didn’t it have that effect in 2013?
Data from other countries suggests that income tax rates on the wealthy would need to be much higher — above about 60 per cent — to significantly reduce their share of national income, Saez concludes.
When those rates range between 28 per cent and 43 per cent — the rates that have existed in the U.S. since 1988 — “top incomes do not appear to be very sensitive to top tax rates,” he wrote.