Does it Pay to Tax the Rich?

Policy Brief: January 6, 2020

By: Zhigang Ge, University of Wisconsin-Madison Department of Economics

Abstract:

The recent tax policy debate has largely focused on increasing taxes on top earners. Many policies have been proposed with the clear goal of raising tax revenues, such as increasing top income tax rates or imposing wealth taxes. My research shows that the revenue gains from these policies are likely to be limited in an environment where most top earners are private business owners, as is the case in the contemporary United States. Increasing taxes on such entrepreneurs reduces the growth of entrepreneurial capital and business earnings, and thus limits the amount of revenue that such a tax can raise in the long run. Moreover, the decline in capital reduces the productivity of the workers that are hired by entrepreneurs, which leads to lower wages for these workers.  Introducing a wealth tax on top earners, as has been recently proposed, would lead to a reduction in the income tax base that would largely offset any revenue gains.  Overall, my results suggest that there is relatively little revenue to be gained from increasing taxes on top earners.


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