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1、OXORDDoWn-Oadedfromh=psacadem6bupbomerrtQe2225396500315bygues-On07MarCh2024Socio-EconomicReview,2022lVol.20,No.21539-559doi:10.1093sermwab061AdvanceAccessPublicationDate:7January2022ArticleArticleTheeconomicconsequencesofmajortaxcutsfortherichDavidHope*andJulian1.imberg)DepartmentofPoliticalEconomy,
2、KingsCollege1.ondon,1.ondonWC2B4PX,UK*Correspondence:david.hopekcl.ac.ukAbstractThelast50yearshasseenadramaticdeclineintaxesontherichacrosstheadvanceddemocracies.Thereisstillferventdebateinbothpoliticalandacademiccircles,however,abouttheeconomicconsequencesofthissweepingchangeintaxpolicy.Thisarticle
3、contributestothisdebatebyutilizinganewlyconstructedindicatoroftaxesontherichtoidentifyallinstancesofmortaxreductionsontherichin18OrganisationforEconomicCo-operationandDevelopment(OECD)countriesbetween1965and2015.Wethenestimatetheaverageeffectsofthesemajortaxreformsonkeymacroeconomicaggregates.Wefind
4、taxcutsfortherichleadtohigherincomeinequalityinboththeshort-andmedium-term.Incontrast,suchreformsdonothaveanysignificanteffectoneconomicgrowthorunemployment.Ourresultsthereforeprovidestrongevidenceagainsttheinfluentialpolitical-economicideathattaxcutsfortherich,trickledowntoboostthewidereconomy.Keyw
5、ords：taxation,inequality,incomedistribution,economicgrowth,unemploymentJE1.classification:D31personalincome,wealth,andtheirdistributions,E62fiscalpolicy,047empiricalstudiesofeconomicgrowth,aggregateproductivity,cross-untryoutputconvergence1. IntroductionThepasthalfcenturyhasbeenaperiodofsubstantialc
6、hangeintaxpolicyintheadvanceddemocracies(Steinmo,2003;KiserandKarceski,2017).AparticularlyprominentpartofthistransformationhasbeenthedramaticfallintaxesontherichacrosstheOrganisationforEconomicCo-operationandDevelopment(OECD)countries(Ganghof2006;Hopeand1.imberg,2021).Whilethissweepingpolicychangeha
7、sbeenwelldocumented,itsconsequencesfortheeconomyarelesswellunderstood.Proponentsofthetaxcutsfortherichoftenarguefortheirbeneficialeffectsoneconomicperformance.Thislineofreasoning,focusingonefficiencygainsandtheremovalOfbehavioraldistortions,hasbeencentraltotheargumentsmadeforseveralmajortaxreformsin
8、theUSAVTheAuthor(三)2022.PublishedbyOxfordUniversityPressandtheSocietyfortheAdvancementofSocio-Economics.ThisisanOpenAccessarticledistributedunderthetermsoftheCreatiVs:/creativecommons.org/licenses/by-n4.0),whichpermitsnon-commercialre-use,distribution,andreproductioninanymedium,providedtheoriginalwo
9、rkispropertycited.Forcommercialre-use,pleasecontactjournals.permissions(AuerbachandSlemrod,1997;Bartels,2005;GaleandSamwick,2017).Therearefewmacro-levelempiricalstudiesexploringtherelationshipbetweentaxesontherichandeconomicperformance,however,andtheevidencewedohaveismixed.Whilesomestudiesfindhigher
10、topmarginalincometaxratesandtaxprogressivityadverselyaffecteconomicgrowth(PadovanoandGalli,2002;Gemmelleta1.,2014),anumberofotherstudies11ndnosignificantassociation(1.eeandGordon,2005;Angelopoulosetal.,2007;P汰ettyetal.,2014).Ontheothersideofthedebate,manyopponentsoftaxcutsforthericharguethattheysimp
11、lyfurtherconcentrateincomeinthehandsoftheaffluent.ThepioneeringworkofPikettyandco-authorschartingtheevolutionoftopincomesoverthecourseofthe20thcenturyhasshownthatreductionsintaxprogressivityinrecentdecadeshavegonehand-in-handwithsoaringincomeinequality,especiallyintheAnglo-Saxoncountries(Atkinsonand
12、Piketty,2007;Alvaredoetal.,2013;Piketty,2014).Thisissupportedbyevidencefromcross-countrypanelstudiesthathavefoundthatlowertaxesontherich,especiallytopmarginalincometaxrates,arestronglyassociatedwithrisingtopincomeshares(Roineetal.,2009;VolschoandKelly,2012;Pikettyetal.,2014;Huberetal.,2019).Giventhe
13、lackofconsensusinexistingempiricalanalyzesandthedifficultiesofmakingcausalinferencesfrommacro-levelpaneldataanalyzes,itremainsanopenempiricalquestionhowcuttingtaxesontherichaffectseconomicoutcomes.Webelievethequestionisbestansweredbylookingattheeffectsofmajortaxcutspackages,asthestoryoftaxingtherich
14、intheadvanceddemocraciesoverthepast50yearsisoneofdiscreteandstarkchangesinpolicy.Forexample,RonaldReaganimplementedtwomajorpackagesoftaxcutsfortherichinhistimeintheWhiteHouse,onein1981andanotherin1986.Asimilarpatternoflarge,infrequenttaxcutscharacterizedThatcherstaxreformsintheUK,aswellasreformtraje
15、ctoriesinmanyotheradvanceddemocracies(seeSection3).Focusingontheeffectsofindividualreformsalsoallowsustoapplyanewstatisticalapproachforcausalinferenceinobservationalstudiesthatappliesanovelmatchingmethodtopooledtimeseriesdata.Thisisparticularlypertinentinthiscase,asthereisalargeliteratureonthepowero
16、frichvotersandorganizedbusinessintereststoshapepublicpolicies(includingtaxpolicies)intheirfavor(Gilens,2005;Bartels,2009;HackerandPierson,2010;Svallfors,2016;EmmeneggerandMarx,2019),whichsuggestsreversecausalitycouldbeamajorissueinempiricalstudieslackingaclearidentificationstrategy.Thereareonlyahand
17、fulofexistingmacro-levelstudiesexploringtheeconomicconsequencesofspecifictaxcutsfortherichandtheirexternalvalidityisconstrainedbyfocusingonasmallnumberoftaxcuts(Saez,2017;RubolinoandWaldenstrom,2020)orontaxreformsinasinglecountry(Zidarl2019).Thisarticletakesawiderlens,lookingatallmajorreductionsinta
18、xesontherichacross18OECDcountriesfrom1965to2015.Wealsodrawonamorecomprehensiveindicatoroftaxesontherich,whichtakesintoaccountchangesacrossanarrayoftaxesontopincomes,assets,andcapital.Thisapproachallowsustodrawmoregeneralizableconclusions.Italsoprovidesresearcherswithanewdatasetofmajortaxcutsfortheri
19、chthatcanbeutilizedforfutureempiricalanalyzes.DoWn-Oadedfromh=psacadem6bupbomerrtQe2225396500315bygues-On07MarCh2024Ourresultsshowthatmajortaxcutsfortherichincreaseincomeinequalityintheyearsfollowingthereform(/+1tof+5).Themagnitudeoftheeffectissizeable;onaverage,eachmajorreformleadstoariseintop1%sha
20、reofpre-taxnationalincomeofover0.7percentagepoints.Theresultsalsoshowthateconomicperformance,asmeasuredbyrealGrossDomesticProduct(GDP)percapitaandtheunemploymentrateisnotsignificantlyaffectedbymajortaxcutsfortherich.Theestimatedeffectsforthesevariablesarestatisticallyindistinguishablefromzero,andthi
21、sfindingholdsinboththeshortandmediumrun.Ourfindingsontheeffectsofgrowthandunemploymentprovideevidenceagainstsupplysidetheoriesthatsuggestlowertaxesontherichwillinducelaborsupplyresponsesfromhigh-incomeindividuals(morehoursofwork,moreeffort,etc.)thatboosteconomicactivity(seestandardmodelsofoptimallab
22、orincometaxationinSaez,2001andPikettyandSaez,2013).Relatedly,theyalsoshowlittlesupportfortheinfluentialpolitical-economicideathattaxcutsfortherich,trickledowntoboostwidereconomicperformance(Sowell,2012).Theyare,infact,moreinlinewithrecentempiricalresearchshowingthatincometaxholidays,windfallgainsand
23、taxcutstargetedatthetopdecileoftheincomedistributiondonotleadindividualstoSignifiCantIyaltertheamounttheywork(Akeeetal.,2010;JonesandMarinescu,2018;Mart,mezetal.,2021;Zidar,2019).Overall,ouranalysisfindsstrongevidencethatcuttingtaxesontherichincreasesincomeinequalitybuthasnoeffectongrowthorunemploym
24、ent.Weemployameasureoftop1%shareofpre-taxnationalincomethatincludesbothlaborandcapitalincome,whichmakesitlesslikelythattaxshiftingandavoidancearedrivingtheresults.Infact,ourresultsaremoreinlinewithPikettyetal.(2014),whosuggestthatlowertaxesontherichencouragehighearnerstobargainmoreforcefullytoincrea
25、setheirowncompensation,atthedirectexpenseofthoselowerdowntheincomedistribution.Theremainderofthearticleisstructuredasfollows.Section2explorestheexistingliteratureontheeconomiceffectsofcuttingtaxesontherich.Section3setsoutourdataandempiricalstrategy.WepresentourheadlineresultsinSection4,beforecarryin
26、goutavarietyofrobustnesstestsinSection5.1.astly,Section6concludes.2. TheeconomiceffectsofcuttingtaxesontherichThe20thcenturywasoneofimmensechangeinthetaxsystemsofadvanceddemocracies.HighlyprogressiveincometaxesaroseinthewakeofthetwoWorldWars,withaveragetopmarginalincometaxratesstillstandingataround6
27、0%intheearly1980s.Thatdecadeprovedtobeamajorturningpoint,however,andaveragerateshavesincefallentounder40%(ScheveandStasavage,2016;KiserandKarceski,2017).Thistrendwasmirroredinothertaxesonthewealthyandcorporations,whichalsodroppedsharplyoverthepasthalfcentury(Hopeand1.imberg,2021).Alargebodyofworktha
28、tspanseconomics,sociologyandpoliticalsciencehassoughttoexplorethecausesandconsequencesofthiswidespreadandsignificantreductionintaxprogressivity.ScheveandStasavagerS(2010,2012,2016)pioneeringhistoricalresearcharguesthatprogressivesystemsemergedduetomassconscriptionforwar,butthatthestrengthofthesecomp
29、ensatorydemandsforfiscalfairnesshaveweakenedovertime,leadingtofallingprogressivity.Otherscholarspointtotheroleofmajorstructuralchangesintheadvanceddemocracies,suchascapitalmobilityandtrade(SwankandSteinmo,2002),internationaltaxcompetition(GenschelandSchwarz,2011),andtheriseoftheknowledgeeconomy(Hope
30、and1.imberg,2021),inunderminingthehighlyprogressivetaxsystemsofthepost-warera.1.astly,Blyth(2002)andSwank(2006,2016)findevidencethatthediffusionofneoliberaleconomicideasfromtheUSAwascrucialtodrivingthemajortaxreductionsseenelsewhere.DoWn-Oadedfromh=psacadem6bupbomerrtQe20525396500315bygues-On07MarCh
31、2024Thereisalreadyasubstantialtheoreticalliteratureontheeconomiceffectsofcuttingtaxesontherich.Thereareanumberoflinesofreasoninginthatliteraturethatpredictpositiveeffectsofcuttingtaxesontherichoneconomicperformance.Standardmodelsofoptimallaborincometaxation(see,e.g.thetextbookmodelsinSaez,2001andPik
32、ettyandSaez,2013)predictapositivelaborsupplyresponsefromhigh-incomeindividualstolowertoptaxrates(e.g.workingmorehours)thatboostsoveralleconomicactivity.Onamoremacro-level,theoreticalmodelsofeconomicgrowthtypicallypredictthatmoreprogressivetaxsystemsdampeneconomicperformancebystiflinginvestmentinphys
33、icalandhumancapital(Gemmelletal.,2014).Recentworkhasalsodrawnalinkbetweentaxesontherichandproductivity.Insofarastaxesontherichapproximatefortaxesonentrepreneurs,lowertaxesontherichmaystimulategrowthandemploymentbyencouragingrisk-taking,innovationandentrepreneurship(1.eeandGordon,2005;Arnoldetal.,201
34、1).Ontheothersideofthecoin,therearetheoriesthatpredictadverseeconomiceffectsfromreducingtaxesontherich.ThemostprominenttheoryrelatestothebargainingpowerofCEOsandothertopexecutives.Whentaxesontopincomesarelower,highearnershavemoretogainfromaggressivelybargainingtoincreasetheirowncompensation.Thisrise
35、inunproductive,rent-seekingbehaviorpushesupincomesatthetopbutattheexpenseofemploymentandgrowthinthewidereconomy(Alvaredoetal.,2013;Pikettyetal.,2014).Anotherimportantstrandoftheliteraturefocusesontherelationshipbetweencorporateincometaxesandcorporatesavings.Generalequilibriummodelswithcapitalandprod
36、uctmarketimperfectionspredictthatcorporateincometaxcutswillincreasecorporatesavings(Chenetal.,2017).Relatedempiricalworkshowsthatcorporateincometaxcutshaveindeedcontributedtothestarkaccumulationofsavingsamongnon-nancialfirmsinadvancedeconomiesinrecentdecades,whichhavebeenlargelystashedinnancialmarke
37、tsinsteadofbeingreinvestedinwaysthatstimulategrowthandemployment(Redeker,2021).Whilethereisclearambiguityinthetheoreticalliteratureonthepredictedeffectsofcuttingtaxesontherichongrowthandemployment,thereismoreconsensuswhenlookingatthepredictedeffectsonincomeinequality.Therearethreemainargumentsinthel
38、iteratureforwhywewouldexpectlowertaxesontherichtobeassociatedwithhigherincomeinequality,asmeasuredbythepre-taxincomeshareofthetop1%(Huberetal.,2019).Thefirstisthatlowertaxesontherichimprovetheworkincentivesofhighearners,leadingthemtoaccruemoreearnedincome,aswellasraisingtheirincentivestoinvest,boost
39、ingcapitalincomes(seethediscussionoftherelevantliteratureinVolschoandKelly,2012).Thesecondargumentrelatestotaxevasionandavoidance.Whentaxesonthericharelower,thismayreducetheincentivesforshiftingtaxableincomesintoothertimeperiodsorbasestominimizetaxliabilities(Pikettyetal.,2014;RubolinoandWaldenstrom
40、,2020).Third,asalreadyoutlinedpreviously,lowertaxesontherichmayincreasetheincentivesoftopexecutivestobargainforcefullyforhighercompensation(Alvaredoetnl.,2013;PikettyefN.,2014).DoWn-Oadedfromh=psacadem6bupbomerrtQe20525396500315bygues-On07MarCh2024Turningtothegrowingempiricalliteratureontheeconomice
41、ffectsofcuttingtaxesontherich,wealsoseemoreambiguitywhenlookingattheeffectsoneconomicactivity.Severalprominentcross-countrypaneldataanalyzeshavefoundthattaxprogressivityisnotsignificantlyassociatedwitheconomicgrowth(1.eeandGordon,2005;Angelopoulosetal.,2007;Pikettyctal.,2014),althoughtherearesomeexc
42、eptions,whichfindadverseeffectsofmoreprogressivetaxsystemsoneconomicperformance(PadovanoandGalli,2002;Gemmelletal.,2014).Studiesusingsimilarmethodologiesthatexploretherelationshipbetweentaxingtherichandincomeinequalitytendtofindastrongnegativeassociationbetweentopmarginalincometaxratesandtopincomesh
43、ares.Inotherwords,theyfindthatfallingtaxesontherichsincethe1980shavecoincidedwithrapidlyrisingincomeinequality,especiallyatthetopofthedistribution(Koineeta.,2009;VolschoandKelly,2012;Pikettyetal.,2014;Huberetal.,2019).Apitfailofalargeportionoftheempiricalliteratureontheconsequencesoffallingtaxprogre
44、ssivityisthatitdoesnottakeintoaccountthetypicalpatternoftaxreformwithincountries.Taxcutsfortherichintheadvanceddemocracieshavemostlybeenstarkandirregular,asshowninSection3.ItisthereforeimportanttolookattheconsequencesOfindividualreformpackagesifwehopetounderstandtheeconomiceffectsofcuttingtaxesonthe
45、rich.TherearefewexistingstudiesthatestimatetheeconomiceffectsOfinstancesofmajortaxreformontherich.Saez(2017)analyzesthe2013taxincreaseontherichintheUSAandndsithasonlyshort-termeffectsonincomeinequality.InanotheranalysisfocusedontheUSA,Zidar(2019)exploitsregionalvariationtolookatthegrowthandemploymen
46、teffectsofcuttingtaxesondifferentpartoftheincomedistribution.Hefindsthattheeffectofcuttingtaxesonthetop10percentonemploymentgrowthissmall.Thecloseststudytoours,however,isRubolinoandWaldenstrom(2020).TheyutilizethesyntheticcontrolmethodandfindthatthreemajorreductionsintopmarginalincometaxratesinAustr
47、alia,NewZealandandNorwayhadlastingandlargepositiveeffectsontopincomeshares,butnosignificanteffectsoneconomicgrowth.Webuilduponthisstudybyidentifyingmajorreductionsintaxprogressivityusingamorecomprehensivemeasureoftaxesontherichthatgoesbeyondincometaxprogressivity.Wealsolookatallmajorreductionsintaxe
48、sontherichacross18OECDcountriesfrom1965to2015,whichstrengthensthegeneralizabilityofourresults.Ourresearchisalsocloselyrelatedtoanascentstrandofexperimentalresearchinpoliticaleconomythatlooksathowcitizenspreferencesfortaxingtherichareshapedbytheirviewsabouthowtheeconomyworks(Barnes,2021)andbytheirbel
49、iefsintheextenttowhichthebenefitsoftaxcutsfortherich*trickledown,tothoselowerdowntheincomedistribution(Stantcheva,2021).3. DataandempiricalstrategyDoWn-Oadedfromh=psacadem6bupbomerrtQe2225396500315bygues-On07MarCh2024Estimatingtheeffectoftaxcutsfortherichfacestwomajorempiricalproblems:measuringtaxesontherichandisolatingtheeffectoftaxreforms.First,governmentsdonotlevysolelyonesingletaxontherichestmembers
