Key Issue: What does research tell us about individual tax rates ?
Research on individual tax rates reveals several unique and important insights:
Elasticity of taxable income: Studies show that high-income earners are significantly more responsive to tax rate changes than lower-income individuals. The elasticity of taxable income for top earners is estimated around 0.4, meaning their reported income is quite sensitive to tax policy changes.
Revenue-maximizing rate vs. optimal rate: While the Laffer Curve suggests a revenue-maximizing tax rate (often estimated around 70%), many economists argue this rate is not necessarily optimal when considering broader economic impacts. The ideal rate may be lower to promote economic growth and efficiency.
Progressivity debate: There's a stark contrast in views on ideal top tax rates, with some economists like Piketty and Saez proposing rates as high as 80% or more, while others argue for much lower rates to encourage economic growth and entrepreneurship.
Simplification benefits: A consistent theme in research is the potential economic gains from simplifying the tax code by broadening the base and lowering rates. This approach could reduce distortions and improve efficiency, though it may conflict with other policy goals.
Context-dependency: The research emphasizes that ideal tax rates are not universal but depend heavily on specific economic conditions, existing institutions, and societal preferences. This highlights the need for ongoing analysis and potential adjustments to tax policies over time.
Key lessons from the research on ideal individual tax rates:
Optimal Rate Range: Studies suggest there is an optimal range for tax rates that balances revenue generation with economic growth. While the exact range is debated, many economists believe top marginal rates above 70-80% can be counterproductive, reducing economic activity and overall tax revenue. The concept of the Laffer Curve illustrates this relationship, though its exact shape is uncertain.
Income Level Considerations: The impact of tax rates varies significantly based on income levels. Research shows that high-income earners are more responsive to tax changes than lower-income individuals. This implies that tax policy should consider these differential effects when setting rates across income brackets to maximize both revenue and economic efficiency.
Progressivity Trade-offs: There's an ongoing debate about the ideal level of tax progressivity. Some economists argue for highly progressive systems with very high top marginal rates to reduce inequality. Others contend that excessive progressivity can harm economic growth and entrepreneurship. The ideal balance depends on societal preferences regarding equality versus efficiency.
Simplification Benefits: Many studies highlight the potential benefits of simplifying the tax code by broadening the tax base and lowering overall rates. This approach can reduce distortions in economic decision-making and improve overall efficiency. However, it may conflict with goals of using the tax system to incentivize certain behaviors or provide targeted relief.
Context Dependency: Research suggests that ideal tax rates are not universal but depend on specific economic conditions, existing institutions, and policy goals. What works in one country or time period may not be optimal in another context. This underscores the importance of ongoing analysis and potential adjustment of tax policies.
Studies indicate that very high marginal tax rates can discourage economic activity and reduce overall tax revenue. The concept of the Laffer Curve suggests there is an optimal tax rate that maximizes government revenue, often estimated to be around 70%. However, many economists argue the revenue-maximizing rate is not necessarily the ideal rate when considering broader economic impacts. A study by Christina Romer and David Romer found that a 1% increase in the marginal tax rate reduces real GDP by 2-3% after 2-3 years.
Research also shows that the impact of tax rates varies depending on income levels. Lower-income individuals tend to be less responsive to tax rate changes, while high-income earners are more likely to adjust their behavior in response to tax policy. A study by Emmanuel Saez and colleagues found that the elasticity of taxable income for top earners is around 0.4, meaning a 1% increase in the net-of-tax rate leads to a 0.4% increase in reported taxable income.
Some economists argue for a more progressive tax system with higher rates on top earners to reduce inequality. Thomas Piketty and Emmanuel Saez have proposed top marginal tax rates of 80% or higher. However, others contend that very high rates on high earners could reduce economic growth and entrepreneurship. The ideal balance likely depends on societal preferences regarding the trade-off between equality and economic efficiency.
Overall, while economic research provides important insights, determining ideal tax rates involves value judgments about equity, efficiency, and other policy goals. Most economists agree that simplifying the tax code by broadening the base and lowering rates could improve efficiency. However, the specific ideal rates remain a subject of ongoing debate among researchers and policymakers.
Here are Kamala Harris's tax positions described in paragraphs:
Corporate taxes: Harris supports raising the corporate tax rate from 21% to 28%. This would partially reverse the tax cuts implemented under the Trump administration. She argues this increase is necessary to fund various economic and social programs. Harris believes corporations should pay their "fair share" to support national initiatives. This position aligns with mainstream Democratic policy but is less aggressive than some progressive proposals.
Capital gains taxes: Harris proposes increasing the top long-term capital gains rate to 28% or 33% for high earners, up from the current 20% rate. This would apply to individuals making over $1 million per year. The increased rate aims to generate more revenue from wealthy investors. Harris argues this change would help reduce income inequality. Her position on capital gains represents a significant shift from current policy but is less extreme than some other Democratic proposals.
Income taxes: Harris supports maintaining Biden's pledge not to raise taxes on households making less than $400,000 per year. She would likely keep the top individual income tax rate at 39.6% for high earners. This stance aims to protect middle-class families while increasing revenue from the wealthiest Americans. Harris's position on income taxes is generally in line with mainstream Democratic policy. She argues this approach balances fiscal responsibility with economic fairness.
Tax credits: Harris has proposed expanding several tax credits to benefit middle and lower-income families. These include a $6,000 tax credit for families with newborns in their first year and restoring the expanded Child Tax Credit of $3,600 per child. She also supports expanding the Earned Income Tax Credit. Harris argues these credits will provide crucial financial support to working families. Her tax credit proposals aim to reduce child poverty and increase economic stability for low and middle-income households.
Wealth tax: Harris supports a version of Biden's "Billionaire Minimum Income Tax" proposal. This would require households worth over $100 million to pay a minimum 25% tax rate on income, including unrealized capital gains. The proposal aims to ensure the ultra-wealthy pay their "fair share" in taxes. Harris argues this approach will help reduce wealth inequality. While not as aggressive as some wealth tax proposals, this position represents a significant shift in how the wealthiest Americans would be taxed.
Tax incentives for small business startups. Her plan includes:
Increasing the federal tax deduction for small business startup expenses from $5,000 to $50,000. This represents a tenfold increase in the current deduction limit.
The goal of this increased deduction is to help spur the creation of new small businesses and encourage entrepreneurship.
Harris aims to use this policy to help create a record 25 million new small businesses.
This proposal is part of Harris's broader economic plan, which focuses on supporting small businesses and entrepreneurs.
The increased deduction is intended to reduce the financial barriers for starting a new business by allowing entrepreneurs to deduct more of their initial startup costs.
This policy position demonstrates Harris's focus on encouraging small business growth and entrepreneurship as part of her economic strategy. By significantly increasing the tax deduction for startup expenses, Harris aims to make it financially easier for individuals to start new businesses, potentially stimulating economic growth and job creation.
Sources:
Romer, C. D., & Romer, D. H. (2010). The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. American Economic Review, 100(3), 763-801.
Saez, E., Slemrod, J., & Giertz, S. H. (2012). The elasticity of taxable income with respect to marginal tax rates: A critical review. Journal of Economic Literature, 50(1), 3-50.
Piketty, T., Saez, E., & Stantcheva, S. (2014). Optimal taxation of top labor incomes: A tale of three elasticities. American Economic Journal: Economic Policy, 6(1), 230-271.
Goolsbee, A., Hall, R. E., & Katz, L. F. (1999). Evidence on the high-income Laffer curve from six decades of tax reform. Brookings Papers on Economic Activity, 1999(2), 1-64.
Diamond, P., & Saez, E. (2011). The case for a progressive tax: from basic research to policy recommendations. Journal of Economic Perspectives, 25(4), 165-190.