New Study: Raising Taxes on High-Income Earners Pays Off
When faced with income tax increases that ask them to pay their fair share, the wealthy don’t move out of states, don’t stop their entrepreneurial efforts and don’t scale back their work efforts.
That’s the key message in a new study that reviews decades of research related to taxing high-income earners.
The study, released by the Political Economy Research Institute at the University of Massachusetts – Amherst, pokes holes in many of the talking points used by those who speak out against so-called millionaires’ taxes in New Jersey and elsewhere:
The literature suggests that the fears voiced in policy debates over raising revenue from high- income households are unlikely to materialize. The rich will not go on strike. They will not cease working, stop investing, or move, but they will find ways to shift the timing and composition of their income to avoid some taxes.
Study author Jeffrey Thompson explains that because of these shifts, revenues reaped from such tax increases will be less than expected if the model doesn’t take tax avoidance into account. However, he notes, revenues will still increase, and by quite a bit.
In New Jersey, increasing the top tax rates on those making more than $500,000 a year, as outlined below, could bring in $550 million a year.
• From 8.97% to 9.5% on income between $500,000 and $999,999
• From 8.97% to 10% on income between $1 million and $3 million
• From 8.97% to 11% on income over $3 million
The study’s bottom line? States should pursue these taxes not only out of a sense of fairness but to help “sustain public spending on vital services”:
Tax avoidance strategies would have only a small impact on tax revenues generated, and reductions in work hours, entrepreneurial efforts, or migration out of state are unlikely to occur at all. The benefits of sustaining appropriate levels of funding on K-12 and public higher education, public safety, and transportation, should be weighed against the reality of these consequences, rather than unsubstantiated fears.