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Does Raising Taxes on the 1% Affect Job Growth?

Macro Final Project

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Does Raising Taxes on the 1% Affect Job Growth?

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  1. DOES RAISING TAXES ON THE HIGHEST INCOME EARNERS AFFECT JOB GROWTH IN THE UNITED STATES? API-119 Spring 2012 Final Project AditiChokshi GayatriDatar Sarah Grossman-Greene Elizabeth Koshy Laura McGorman

  2. THE GROWTH OF INCOME INEQUALITY FROM 1979-2007, REAL AFTER-TAX INCOME GREW BY:

  3. THE RHETORIC “What some are suggesting is that we take this money from people who would invest in our economy and create jobs and give it to the government. The fact is you can't tax the very people that we expect to invest in the economy and create jobs.” John Boehner (R-Ohio)

  4. THE RHETORIC “A tax hike would wreak havoc … on our economy’s ability to create private-sector jobs” John Boehner (R-Ohio)

  5. THE RHETORIC “With over 20 million people who are unemployed or who have stopped looking for work, the last thing we should be doing is raising taxes on job-creators, entrepreneurs, and small business owners across America.” Mitt Romney (Republican Presidential Candidate)

  6. TWO DRIVERS OF RISING INEQUALITY CHANGES IN THE U.S. TAX CODE:

  7. TWO DRIVERS OF RISING INEQUALITY CHANGES IN TRANSFER PAYMENTS: Households in the bottom quintile receiving transfer payments: 1979:54% 2007: 36% • Increase in programs focused on the elderly that are not restricted to low-income households • Such as Medicare • Meanwhile, relative share of income spent on programs for the poorest has declined • Such as Temporary Assistance for Needy Families

  8. WHO ARE THE WEALTHIEST AMERICANS? In 2010: The top 1% made $352,000 or more per year The top 0.1% made $1,000,000 or more per year 2005 Decomposition of the Top 1% 31% Executives, managers, supervisors (non-finance) Lawyers Medical 16% 8% Financial professionals 14%

  9. TOP TAX RATES & ECONOMIC OUTCOMES “Over the past two decades, small businesses have created 65 percent of new jobs in our country. Our small businessmen and women are still struggling. Currently, cash-strapped small-business owners are facing a federal tax rate as high as 35 percent” - Eric Cantor, House Majority Leader

  10. TOP TAX RATES & ECONOMIC OUTCOMES CLAIM 1: Small business owners log their business earnings as personal income and hence raising income taxes on the top 1% means hurting the job creators of our economy • Only 1.9% of small businesses fall in the top two tax brackets • Small businesses stand to benefit from more progressive tax policies: • Over one third of small business filers are either in the lowest income tax bracket or have incomes too low to pay income taxes • 14.5% of small business filers qualified for the Earned Income Tax Credit

  11. TOP TAX RATES & ECONOMIC OUTCOMES CLAIM 2:Taxes on the top 1% dampen economic activity and consumption, thus hindering job growth. • Wealthier households typically pay for their tax increases out of savings • Moody’s finds that savings rates of the richest households correlate negatively with tax changes. • Recent empirical work has argued that raising taxes on the rich would be least likely to reduce overall demand and consumption in the economy while balancing the deficit Financial professionals

  12. TOP TAX RATES & ECONOMIC OUTCOMES CLAIM 3:Taxing CEOs with high pay destroys incentives for their companies to do well, hindering job growth. • Positive relationship between CEO compensation and firm valuation • This has little to do with job creation • High CEO compensation might come at the cost of jobs • 2011 study by Institute for Policy Studies: CEOs at the 50 companies that announced the biggest layoffs since late 2008 made 42% more in 2009 than the average large company CEO

  13. EXISTING EVIDENCE & ITS LIMITATIONS

  14. EMPIRICAL FINDINGS EXOGENOUS Reagan tax cut of 1982 ENDOGENOUS Revenue & Expenditure Control Act of 1968 “I have long advocated a 30 percent reduction in income tax rates” - Ronald Reagan (1980) “Fiscal restraint is essential to our economic health” - 1968 Economic Report

  15. EMPIRICAL FINDINGS: TAKEAWAYS • There is no association between job creation and increases in marginal income tax rates for the top bracket • Increases in capital gains tax rate have a positive impact on job growth immediately following the hike, however this effect is undone 2.5 years later • These results are robust to several specifications INCREASES IN THE TOP TAX RATE HAVE NOT AFFECTED JOB CREATION Financial professionals 14%

  16. POLICY RECOMMENDATIONS Reinvigorate discussion on the Buffet rule End Bush tax cuts on the wealthy in 2012 Reframe the debate in light of new evidence

  17. APPENDIX

  18. ECONOMETRIC RESULTS (1/2)

  19. ECONOMETRIC RESULTS (2/2)

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