In the world of political economics, one of the more hotly debated issues is whether taxes matter for economic growth.
On the one side of the debate are individuals with more common sense evidence that basically says – yes, taxes matter. The idea that people don’t think or care about taxes, or that it doesn’t affect how they behave is goofy.
Examples of evidence that taxes matter include such empirical findings that individuals shift to to buying tobacco products out of state when a state increases its tobacco tax rate or the current shift of consumers to making online purchases or the shift by businesses and high net worth individuals to realizing capital gains in the year before new capital gains rates go into effect.
These three examples, and numerous others, are empirically verified.
On the other side of the debate are individuals, generally government economists or left-leaning advocates with a desire to increase the costs of government services, who argue that taxes represent less of a concern than do other things individuals and businesses have to worry about. The thinking is that because individuals and businesses have more important things to worry about that the government taking more of their money, taxes generally don’t have their behavior.
As evidence of their left-leaning argument, individuals will point to either non-existent, very weak, or only moderately weak evidence that higher taxes reduce economic growth.
Well, the tax increases imposed by the federal government from 2012 to 2013 represent another test case of whether taxes matter. What happened?
Before showing the empirical evidence, here are the major tax changes from 2012 to 2013.
The tax change include increased tax rates on individuals making over $400K if you’re single and $450K if you’re married; higher capital gains taxes; new Medicare payroll taxes on unearned and earned income (depending on income level), expiration of the payroll tax holiday (2 percent on earned income below $113,700); and phaseouts of the personal exemption and itemized deductions.
What happened with federal government revenue going from 2012 to 2013?
Here’s a look at the cumulative 12 month moving average federal income tax. The chart clearly shows a marked uptick in revenue in late December and around April 15th (the day payments are due). Not surprisingly, these are the time periods in which tax payments due to shifting of gains from 2013 to 2012 would show up. (For individuals wanting statistical evidence – go ahead and check it using time-series econometric models adjusting for tax rates, the economic cycle, and other indicators, the results show tax rates matter.)
How big of a shift is it? Probably at least $125 billion in federal income tax revenue, or, in terms of income, about $625 billion in personal income.
Now, one can argue about whether $625 billion is material given anticipated total 2013 personal income in the United States of $14.3 trillion, but one thing one can’t argue with is that taxes affected behavior, to the tune of 5 percent.
Overall, the recent federal tax increases provide more case study evidence that taxes affect behavior, with the income shift from 2013 to 2012 of at least $625 billion.
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