Debunking Supply-Side Dogma

Apr 30 2012 @ 6:18pm

Taxes_Growth

Chye-Ching Huang reviews [pdf] the economic evidence on tax increases. The findings are pretty clear:

Opponents of raising effective marginal income tax rates on high-income taxpayers claim that higher rates would discourage them from working, thereby reducing labor supply and harming the economy. But for high-income taxpayers in particular, as Leonard Burman recently observed, “evidence suggests their labor supply is insensitive to tax rates.”   The empirical evidence on how U.S. taxpayers have responded to tax increases indicates that, at most, high-income taxpayers respond to large cuts in tax rates with negligible increases in work hours.

Johns Hopkins economist Robert Moffitt and Purdue and Pennsylvania State University economist Mark Wilhelm report that work hours among working-age men remained essentially unchanged in response to the marginal tax rate changes made by the 1986 tax law.  Moffitt and Wilhelm’s finding is consistent with earlier empirical studies: University of Michigan Professor Reuven Avi-Yonah has written that the literature as a whole suggests “high-income men are unlikely to decrease hours worked as tax rates go up.”  Other groups, such as married women and older workers have been shown to be very responsive to tax rate changes, but the evidence generally doesn’t show similar responses for those at the top of the income distribution.

Jared Bernstein applauds.