Thursday, February 26, 2009

How Much Does Atlas Shrug?

Russ Robert's asks:
What empirical evidence do we have about the responsiveness of high earners to tax rates? What is the reliability of that evidence?
Since I did some research on this subject in my dissertation, here are some expanded thoughts. First, what are the challenges inherent to studying the income tax responsiveness of the "rich?"
  1. Who are "the rich"? Survey's of the American public tend to say they are people over about $120,000 annual income. Regardless, it is a subjective definition, just as it is deciding who is "poor."
  2. By definition, the rich are a small group of people. This translates empirically into limited degrees of freedom.
  3. The "rich" tend to be difficult to characterize as a population. CEO's are different from elderly with a lifetime of savings, and are different still from professional entertainers.
  4. How do you measure compensation? What is a CEO's compensation when they are paid in a mix of salaries, benefits, and uncashed stocks? Very difficult to deal with.
  5. Do data sets accurately reveal their true behavior? For example, if you have multiple houses in multiple states, which house is your tax residence? Legally, it is whichever house you say is your house, and it is up to competing states to prove otherwise.
  6. The Alternative Minimum Tax, if your dataset is after 2001, makes it tricky to tease out the behavioral consequences of a particular income tax policy.
Every paper tries to deal with these issues in one way or another and all have their individual limitations. While no one paper is convincing on it's own, collectively, they seem to converging on the same result...that the tax responsiveness of the rich is very high. For those interested in the literature, here are some good citations to check out:
Bakija and Slemrod. (2004). "Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns." NBER working paper 10645.
Goolsbee* (2000). "Taxes, High-Income Executives, and the Perils of Revenue Estimation in the New Economy." AER 90, p. 271-75.
Goolsbee* (2000). "What Happens When You Tax the Rich? Evidence from Executive Compensation." J Political Economy, 108, p. 352-75.
Slemrod (1998). "The Economics of Taxing the Rich." NBER working paper 6584.
Ross and Dunn (2007). "The Income Tax Responsiveness of the Rich: Evidence From Free Agent Major League Baseball All-Stars." CEP, 25(4).
All of the above papers suggest that the tax responsiveness of the rich is very high, often dollar-for-dollar. The major paper I am aware of that goes against this is:
Leigh (2005). "Can Redistributive State Taxes Reduce Inequality?" Australian National University Discussion Paper #490.
I believe Leigh's paper has been published in the National Tax Journal, but that is not the citation I have immediately in front of me.
*Yes, the same Austan Goolsbee who was Obama's economic advisor on his campaign. Amusing.


KipEsquire said...

Let's also recall that Atlas Shrugged was not exclusively, or even primarily, about "tax responsiveness" (with all due respect due to Ragnar).

The more pressing point in AS is how government intervention, regulation and rent-seeking/favoritism make it difficult, and perhaps even impossible, for the productive in society to make money (i.e., be productive), regardless of tax rates.


Travis Wiseman said...

I'm amazed at the recent press surrounding AS - a result, of course, of Obama's recent expansionary effort. I was pleased to find this article at the Economist today:

Meanwhile, thanks for joining the debate over at ChampionEconomics -it appears your comment has drawn some attention.

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