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  March 9, 2012

Raising Taxes on Rich does not Slow Jobs Growth

Jeff Thompson: Study shows that while States need revenue, most tax wealthy at lower rates
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Jeffrey Thompson, Assistant Research Professor in Economics, University of Massachusetts at Amherst, focuses primarily on domestic economic policy, with particular emphasis on the New England region and public finance at the state and local government levels. Jeffrey comes to PERI from Syracuse University, where he recently completed his Ph.D. in economics with a dissertation on how migration influences the ability of states to use their tax codes to redistribute income. Prior to his Ph.D. work, Jeffrey was a labor analyst at the Oregon Center for Public Policy for six years and received his Master's degree from the New School for Social Research.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.

Since the beginning of what some people are calling the Great Recession in 2008, revenues to states have sharply plummeted. Most of the response has been cuts—cuts in public spending and the social safety net, education, and other such areas. Very little of this has been made up by increasing revenues, especially in terms of taxes on the affluent. So why? And what would be effect of this? Some people argue that taxing the wealthy drives down investment or makes them leave the state, so you really can't do this as a public policy option.

Well, what's the research on this? Well, there's a new paper out now by Jeffrey Thompson. He's a assistant professor at the PERI institute in Amherst, Massachusetts, and he now joins us. Thanks for joining us, Jeffrey.


JAY: So just quickly, how much revenue—how bad is the situation for states and, I guess, as a derivative of that, the municipalities? What has been the loss of revenues since the beginning of the recession?

THOMPSON: Well, the biggest cuts were experienced between 2009 and 2008. So state and local revenues declined by 18 percent, the largest decline in decades and decades. States, when they put their budgets together, looking forward to being able to provide an equivalent level of services to the previous budget cycle, have found budget holes of around $190 billion across all states back in 2010. Those sizes of those budget shortfalls have not been as large as 2010, but they've continued. So, for example, the budget gap that states anticipated in 2012 was $106 billion, and for 2013 they're looking forward to budget gaps of $44 billion. So they continue, although the deepest declines were in 2009 and 2010.

JAY: So there's essentially two things a state can do. They can either cut spending or raise revenue, as we all know. Now, the arguments against raising revenue by increasing taxes on the wealthy, there in fact have been some states that have done some of this. What's the actual evidence in terms of what happens when there is such increase in taxes?

THOMPSON: Well, broadly, there's basically no evidence that the states that have adopted targeted tax increases at affluent households have suffered economic repercussions. You know, this in part could be that in fact the amount of revenue those states have generated, while impressive, hasn't been even large enough to fill those budget shortfalls. So Oregon, for example, adopted a special temporary tax bracket on very high income households. They still had to implement budget cuts.

So the other explanation, though, is that in fact high-income households are not nearly as responsive to tax increases as some people might have you believe. My review of the evidence on what high-income households do in response when they face tax increases by state governments is I don't think that they leave. The research suggests that they don't leave a state. They're not less likely to continue to work or continue to invest or start small businesses. So there's probably the fact that states that have taken those steps to raise some revenue on high-income households are probably jointly a result that they haven't gone all that far toward raising revenue, and that rich households just aren't as responsive as the opponents seem to promise.

JAY: Now, before we dig into some of the arguments about whether or not to raise taxes at the upper end, I guess it's important that people have an understanding of where state tax revenue's coming from now. And if I understand it correctly, part of the problem here is that most of state tax revenue is a kind of regressive tax anyway. Explain what you mean by that. You talk about that in your paper.

THOMPSON: Sure. In fact, in all 50 states—so all 50 states have an higher effective tax rate on low-income households than they do on high-income households. So if you add up the taxes paid and divide it by their income, that gives you their effective tax rate.

So why does that result hold? It holds because property taxes are the dominant tax of local governments and sales taxes are the biggest state tax, and both of those taxes are regressive—they take more out of the income of lower- and middle-income households than upper-income households.

In addition, the states, many of the states that have income taxes also have fairly flat income taxes, like Massachusetts. The Commonwealth of Massachusetts, where PERI is located, has a flat income tax rate. So everyone pays the same rate. There's a little bit of progressivity in that there are some low-income levels that have a zero rate applied, but everyone who pays the tax pays the same nominal rate.

JAY: Now, just before we dig into some of the examples of states that have raised taxes some, I think it's important to point out something that's in your paper, which is the income, while there's been a big shift of income towards this top 1 percentile, it doesn't tell the whole story, what's been happening at the income level. The concentration of wealth in terms of assets and ownership is even more dramatic. What were your findings on that?

THOMPSON: Yeah. Well, we included some information from some good data sources on the distribution of income, the distribution of wealth. And so if you want a nice metric of the distribution of income, we look at the top 5 percent, the richest 5 percent of households. They control about 37 percent of all income. But when you look at assets or net worth, they control 60 percent of net worth. So the distribution in the concentration of wealth is much more extreme than the concentration of income.

JAY: And those numbers, I think, are 2007 numbers, which means that that actually could be even more now, because during recession, if I understand it correctly, you tend to have even more concentration of wealth, given that there's so much cheap stuff to buy up that if you are sitting on capital, it's a wonderful time to actually even accumulate more assets.

THOMPSON: That could be. I think the evidence on that—I mean, that's definitely one thing that can happen. But I think the evidence is that there are alternative ways that the things could go. You know, a lot of the wealth of very high income households is by privately owned corporations. And business assets and business—the value of businesses has suffered quite a bit. So it could be that the concentration of wealth is tempered a little bit. But the reality is it probably—I would say, I would think, based on what I've seen, that it hasn't changed that much.

JAY: So you think that 60 percent number still would be the correct number.

THOMPSON: Probably.

JAY: Right. Okay. Well, let's dig into, again, some examples of states. How much—that have had some wealth tax. Give us a couple of examples of states that have done it and what have been the consequences of it.

THOMPSON: Sure. One of the precursors, so one of the states sort of leading the way through example and also good research, was New Jersey. So before the crisis hit, in 2006 or 2004 they implemented a 2.6 percent new tax bracket on half-millionaires, so households with $500,000 in income or above. And so a solid study of that paper found that it raised $1 billion in revenue and had no real impact on outmigration behavior from New Jersey.

So, partly inspired by New Jersey, a handful of other states have also adopted sort of targeted additional rates on very high income households. So New York State adopted a rate that was nearly 9 percent for, you know, millionaires or half-millionaires. Oregon also had a temporary higher tax rate on very high income households. So [there are] a handful of states that have sort of taken the plunge in crafting, you know, targeted tax rates to get at those at the very top of the distribution.

JAY: And what happened?

THOMPSON: Well, those states have experienced considerable revenue from those increases. And looking back at the past ten years, you know, there's a nice report from the Institute on Taxation and Economic Policy from earlier this month that suggests that high income tax states are just as likely to be fast-growing as are zero income tax states, and zero income tax states are just as likely to be low-growing states as are high income tax states. There appears to be, on the overall, sort of the broad-brush economic performance, whether it's job growth, income growth, it appears to be no relationship whatsoever between these states adopting high income taxes or having no income tax whatsoever.

JAY: Well, let's start with one of the big arguments against raising taxes. This applies at any level, federal as well, but you've taken it up on the state level. And that's that people at the high income end are the, quote, job creators, and if you tax them, they will create less jobs. They'll invest less and they'll start less new businesses and all that. What did you find when you dug into that?

THOMPSON: Well, ultimately there's not much evidence to support that claim. I mean, there are a number of reasons to think that it's much weaker when you dig behind the superficial appeal. For example, there's a vast literature on the decision for entrepreneurs to start business. So self-employment, small businesses, and the tax—the literature on that very question, that decision to start new businesses, finds that there's no reason to think that tax increases by state and local governments, or at least income tax increases, actually deter the formation of small businesses. There are a couple of papers here and there that find that very high property taxes or payroll taxes may have some deterrence effect, but almost nothing on income taxes, so the taxes that actually get at the rich.

JAY: So actually that's—so the idea of moving more of the tax burden to the upper echelons on income might take some of the pressure off of raising taxes on property taxes and payroll taxes, so it actually becomes a job creator, in theory.

THOMPSON: Yeah. Actually, that's a very likely outcome. You know, why might it be that a payroll tax or a property tax would have a greater effect than an income tax? Well, a small business, when they start out, whether or not they're successful, they're going to be paying taxes on their payroll, they're going to be paying some forms of taxes. They won't actually be paying their income tax unless they're actually earning a profit. So startup conditions might be exactly when a small firm is more at risk of going under, and that's the time when they're paying these other taxes and not the income tax.

JAY: I mean, one of the counterarguments, I expect, would be that even small businesses need to go somewhere for money, and often they go to high-wealth individuals as investors, or you can get loans. And if these high-wealth individuals are getting taxed more, maybe they'll invest less in these smaller businesses. I mean, is there evidence on this?

THOMPSON: Overall there is a—the literature seems to suggest that the tax rate changes don't have an impact on their propensity to start a business. So where would the financing decision come into play there? Well, if capital markets were highly localized, and if the sources of financing and borrowing and startup money were highly local, then that story could possibly have some traction. But there's not a lot of reason to think that capital markets are very local. So small businesses, whether they're borrowing from banks—well, banks are, you know, primarily national banks, even international. So the linkage between the performance of a state and the access to credit of businesses in that state is actually not a very close link at all.

JAY: Okay. Well, in the next segments of our interview, we're going to keep drilling into Jeffery's research paper, and we're going to deal with questions like will people leave a state when taxes go up, will wealthy people work less and will they invest less, and other issues to do with the raising of taxes, which are one of the most fundamental debates going on in this society right now. So please join us for the next part of our interview with Jeffrey Thompson on The Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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