“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
AI Summary.Internal Revenue Service data show residents leaving Massachusetts took a net $4.2bn in adjusted gross income with them, an 8% year-over-year increase, in the first year of a 4% surtax on incomes above $1m, though the number of departing taxpayers slowed. Net outflows predate the surtax, and surtax collections have risen every year.
Greg RyanBloomberg
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Net outflows of adjusted gross income from Massachusetts increased 8% y/y in 2023 to $4.2B, after a 4% surtax on income over $1mm took effect. Top earners leaving the state were responsible for 70% of the outflow.
Does a millionaire surtax accelerate income leaving the state?
Core argument: Residents leaving Massachusetts took a net $4.2 billion in adjusted gross income with them in 2023, an 8% year-over-year increase and one of the largest totals in the country, according to Internal Revenue Service data.
Residents exiting Massachusetts took a net of $4.2 billion in adjusted gross income with them in 2023, one of the largest totals in the country, after a tax on millionaires took effect. The amount was an 8% year-over-year increase, according to Internal Revenue Service data, even as the total number of taxpayers leaving the state slowed. This was the first year that residents were subject to a 4% surtax on incomes over $1 million after voters approved the levy in 2022 to fund schools and transportation. Despite the tax’s implementation, the number of residents moving out of Massachusetts who reported income of $200,000 or more — the top bracket tracked in the IRS data — fell year-over-year. Net outflows from Massachusetts long predate the millionaires tax, especially to Florida and New Hampshire, its northern neighbor, which has no tax on wages or capital gains. Total lost income was also higher in 2021 than 2023. The state’s millionaires-tax collections have increased every year since 2023 and so far in fiscal 2026 have jumped 19% year-over-year to $1.3 billion.
Takeaways by Macro Roundup® AI
Residents leaving Massachusetts took a net $4.2 billion in adjusted gross income with them in 2023, an 8% year-over-year increase and one of the largest totals in the country, according to Internal Revenue Service data.
The number of Massachusetts out-migrants reporting income of $200,000 or more, the top bracket tracked in IRS data, fell year-over-year in 2023, the first year of the voter-approved 4% surtax on incomes above $1 million.
Massachusetts millionaires-tax collections have risen every year since 2023 and are up 19% year-over-year to $1.3 billion so far in fiscal 2026, while net outflows to Florida and New Hampshire predate the surtax.
Behavioral Responses to State Income Taxation of High Earners: Evidence from California— A California ballot measure raising top marginal income tax rates by up to 3 percentage points prompted an additional 0.8% of the affected tax base to leave the state, with an estimated income elasticity of 2.5–3.2 for high earners who stayed. The authors estimate these responses eroded 45.2% of windfall revenues within one year and 60.9% within two.
The Robin Hood State Is Coming For The Rich— In the US, increased redistribution has offset rising pre-tax inequality: Congressional Budget Office data show inequality of taxable income near record highs while inequality after taxes and transfers was lower than in several earlier years and only slightly above 1986. The top 1% of earners paid 40% of income tax in 2022, up from 33% in 2001.
AI Summary.The authors estimate that 94% of U.S. tariff costs were borne domestically over the first eight months of 2025, with a 10% tariff associated with only a 0.6 percentage point decline in foreign export prices. Pass-through into U.S. import prices later declined to 86%, shifting more of the burden to foreign exporters.
Mary Amiti, Chris Flanagan, Sebastian Heise, and David WeinsteinFederal Reserve Bank of New York
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A FRBNY analysis finds that ~90% of tariffs’ economic burden was borne by American firms and consumers in the first 8 months of 2025. Between January and November, however, that incidence declined 8pp as firms reorganised supply chains.
Are U.S. buyers bearing most of the cost of tariffs?
Core argument: U.S. buyers bore 94% of the 2025 tariff incidence during the first eight months of the year, with a 10% tariff associated with only a 0.6 percentage point decline in foreign export prices.
94% of the tariff incidence was borne by the U.S. in the first eight months of 2025. This result means that a 10% tariff caused only a 0.6 percentage point decline in foreign export prices. The tariff pass-through into import prices has declined in the latter part of the year. That is, a larger share of the tariff incidence was borne by foreign exporters by the end of the year. In November, a 10% tariff was associated with a 1.4 percent decline in foreign export prices, suggesting an 86% pass-through to U.S. import prices. Given that the average tariff in December was 13% our results imply that U.S. import prices for goods subject to the average tariff increased by 11% (13 times 0.86) more than those for goods not subject to tariffs. These higher import prices caused firms to reorganize supply chains.
Takeaways by Macro Roundup® AI
U.S. buyers bore 94% of the 2025 tariff incidence during the first eight months of the year, with a 10% tariff associated with only a 0.6 percentage point decline in foreign export prices.
Tariff pass-through into U.S. import prices declined later in 2025: in November a 10% tariff was associated with a 1.4% decline in foreign export prices, suggesting 86% pass-through.
With the average tariff at 13% in December, the results imply U.S. import prices for tariffed goods rose 11% more than for untariffed goods, prices that led firms to reorganize supply chains.
Related Articles:
A Note On Tariffs From The Real World— A large retailer reports that pre-tariff inventory is still being sold, so tariff costs will show up as margin hits later, and that prices must eventually rise roughly 10–15% to cover them. The retailer says its sector's tariff rate went from about 12% to about 33%, and that retailers are holding prices through the holiday season before raising them.
U.S. to Cut Tariffs on Bananas, Coffee and Other Goods From Four Countries— The U.S. announced joint statements with four Latin American countries under which it would reduce tariffs on a range of goods not produced domestically, including bananas and coffee from Ecuador and beef from Argentina. Officials said no government-sponsored beef shipments are planned, but tariff cuts on beef are expected.
Tariffs Are Generating Meaningful New Revenue— New U.S. tariffs are estimated to generate $1.3tn in net new revenue through the end of the current presidential term and $2.8tn through 2034 before economic effects, about $600bn more than previously enacted tariffs. If a court ruling striking down some tariffs is upheld, the remainder could raise as little as $800bn through 2034.
AI Summary.Laffer curves estimated with a realistic tax base are flatter than those using simplified broad or narrow bases, implying smaller revenue gains from raising top tax rates and a lower revenue-maximizing top rate. The authors estimate federal individual income tax revenue peaks at a 47% top rate, yielding only 1.3% more revenue, about 0.1% of GDP.
Rachel Moore, Brandon Pecoraro and David SplinterJoint Committee on Taxation
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JCT calculations suggest that properly constructed individual income tax Laffer curves are flat over wide ranges. Modeling shifting across business types and interactions btw various taxes under 2022 law, they find revenue is ~ constant for top rates btw 37% and 55%.
How much revenue would raising top tax rates actually generate?
Core argument: A Laffer curve estimated with a tax calculator and the true tax base peaks at a top rate of 47%, yielding only 1.3% more federal individual income tax revenue, about 0.1% of GDP.
Laffer curves estimated with more realistic taxes are flatter, suggesting less potential revenue gains from top rate increases and a lower revenue-maximizing top rate. Standard simplifications miss meaningful behavioral margins such as shifting across tax bases and sectors. Interactions between federal individual income taxes and other taxes produce even flatter Laffer curves and smaller revenue gains from higher top rates. Panel A of Figure 2 shows how federal individual income tax revenues change as the top tax rate varies along the x-axis. With a broad base, total income enters the tax function as a single base, applying the top rate to all income even though much of it qualifies for lower preferential tax rates. With a narrow base, only wage income enters the tax function, which fails to apply the top tax rate to any capital income. The true tax base lies between the narrow and the broad base. The Laffer curve estimated using the tax calculator and true base reaches a more modest peak (only 1.3% more tax revenue) at a top tax rate of 47%. Notably, this additional federal income tax revenue is only about 0.1% of GDP. Relative to both the narrow and broad bases, the true base implies smaller potential revenue gains and a lower revenue-maximizing top tax rate.
Takeaways by Macro Roundup® AI
A Laffer curve estimated with a tax calculator and the true tax base peaks at a top rate of 47%, yielding only 1.3% more federal individual income tax revenue, about 0.1% of GDP.
The true tax base lies between a narrow base covering only wage income and a broad base applying the top rate to all income, and it implies smaller potential revenue gains and a lower revenue-maximizing top rate than either.
Standard simplifications omit behavioral margins such as shifting across tax bases and sectors, and interactions between federal individual income taxes and other taxes produce flatter Laffer curves with smaller revenue gains from higher top rates.
Related Articles:
Taxing Top Wealth: Migration Responses and Their Aggregate Economic Implications— Swedish data show that when a wealth-taxed entrepreneur emigrates, employment at their businesses falls 33%, value-added 34%, tax payments 50%, and investment 21%, but 60% of closed firms are absorbed by other domestic companies. The authors estimate aggregate effects on employment and investment are small.
California’s Billionaire Tax Plan Will Backfire— California now draws more than 60% of its revenue from personal income taxes, compared with about 11% in the early 1950s when sales and use taxes supplied nearly 60%. The state's top 1% of taxpayers — roughly 170,000 filers — paid about 40% of personal income tax revenue, payments that depend heavily on unpredictable capital gains.
Ed Conard Debates Furman On “The Expected Value of Risk Taking”— A debate on U.S. fiscal policy argues that spending increases, rather than the tax increases needed to fund them, slow growth, and that higher taxes would reduce the expected value of America's innovative risk-taking. The argument holds that cutting debt below 100% of GDP is critical.
AI Summary.US tariff revenue has reached about $30bn per month, roughly $23bn of it new, and could raise about $2tn over a ten-year budget window if broad tariffs survive legal challenges. The authors argue this shift from income taxation to tariffs is hard to defend, estimating efficiency losses equal to about a third of tariff revenue.
Kimberly Clausing and Maurice ObstfeldNational Bureau of Economic Research
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Tariffs generated $30B in August 2025; $27B of that was new revenue, and the current regime could raise ~$2T over the next decade. Clausing/Obstfeld’s analysis finds that the welfare losses associated with the tariffs offset over a third of the revenue.
Are tariffs an efficient substitute for income taxes?
Core argument: US tariff revenues reached about $30bn per month by August 2025, $23bn of it new relative to August 2024, and if broad tariffs survive legal challenges they could net roughly $2tn over the coming ten-year budget window.
The 2025 tax and budget legislation sharply reduced expected US income tax revenues. At the same time, a dramatic increase in the use of tariffs has caused tariff revenues to surge, reaching about $30 billion per month by August 2025, $23 billion of which is new revenue relative to August 2024. If such broad tariffs survive legal challenges, tariffs could net about $2 trillion in revenue over the coming ten-year budget window. While insufficient to pay for the recent tax legislation, they mark an important source of government revenue that may prove hard for future US administrations to forgo. [Yet] even at revenue-maximizing rates [~30 to 45%], tariff revenues would be only a fraction of current US federal income tax revenue. On conventional tax policy grounds, the US fiscal shift from income taxation to tariffs is difficult to defend. Tariffs are a particularly inefficient source of revenues that [reduce] gains from trade; the efficiency loss from tariffs at summer 2025 levels is about a third of their revenue yield, not including additional costs associated with rent-seeking. [Taking account of] intermediate goods could raise the deadweight costs of tariffs sharply [and raise projected stagflation].
Takeaways by Macro Roundup® AI
US tariff revenues reached about $30bn per month by August 2025, $23bn of it new relative to August 2024, and if broad tariffs survive legal challenges they could net roughly $2tn over the coming ten-year budget window.
Even at revenue-maximizing rates of roughly 30–45%, tariff revenues would amount to only a fraction of current US federal income tax revenue, and they are insufficient to pay for the 2025 tax and budget legislation that sharply reduced expected income tax revenues.
The efficiency loss from tariffs at summer 2025 levels is about a third of their revenue yield, excluding costs associated with rent-seeking, and taking account of intermediate goods could raise those deadweight costs sharply.
Related Articles:
Tariffs Are Generating Meaningful New Revenue— New U.S. tariffs are estimated to generate $1.3tn in net new revenue through the end of the current presidential term and $2.8tn through 2034 before economic effects, about $600bn more than previously enacted tariffs. If a court ruling striking down some tariffs is upheld, the remainder could raise as little as $800bn through 2034.
The Fiscal Future— US debt is on an upward trajectory, and the author argues that extraordinary growth, default, money creation, and spending cuts are each implausible or unacceptable, leaving large tax increases. US governments collect about 28% of GDP in taxes versus 35% in the UK and 46% in France, and a value-added tax could close the roughly 4%-of-GDP fiscal gap.
Tariffs are Dumb Enough to (Almost) Work— A universal 15% tariff on imported goods could raise roughly $300–$400bn annually, a fraction of what a value-added tax would generate but real revenue given U.S. imports of about $4tn. The author argues tariffs are a poorly designed form of consumption tax that could build political groundwork for replacing them with a more efficient value-added tax.
AI Summary.New U.S. tariffs are estimated to generate $1.3tn in net new revenue through the end of the current presidential term and $2.8tn through 2034 before economic effects, about $600bn more than previously enacted tariffs. If a court ruling striking down some tariffs is upheld, the remainder could raise as little as $800bn through 2034.
Marc GoldweinCommittee For A Responsible Federal Budget
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The current tariff regime will raise ~$2.8T net new revenue through 2034, conventionally scored, according to a CRFB estimate. “Those who wish to reduce or reverse the tariffs should put forward alternative sources of deficit reduction to replace them.”
How much new revenue do the new tariffs generate?
Core argument: Tariffs introduced by the Trump Administration are estimated to generate $1.3 trillion of net new revenue through the end of his term and $2.8 trillion through 2034 before economic effects, about $600 billion more than the tariffs in effect as of May.
The new tariffs introduced by the current Trump Administration will generate an estimated $1.3 trillion of net new revenue through the end of his term and $2.8 trillion through 2034, before accounting for economic effects – about $600 billion more than the tariffs in effect as of May. The U.S. Trade Court has ruled some of these tariffs illegal, pending appeal. If the ruling is upheld, the remaining tariffs could raise as little as $800 billion through 2034. Depending on the legal outcome, recent tariff increases will generate 0.2 to 0.8 percent of GDP of net new revenue through 2034 under conventional scoring.
Takeaways by Macro Roundup® AI
Tariffs introduced by the Trump Administration are estimated to generate $1.3 trillion of net new revenue through the end of his term and $2.8 trillion through 2034 before economic effects, about $600 billion more than the tariffs in effect as of May.
The U.S. Trade Court has ruled some of these tariffs illegal, pending appeal, and if the ruling is upheld the remaining tariffs could raise as little as $800 billion through 2034.
Depending on the legal outcome, the recent tariff increases will generate 0.2 to 0.8 percent of GDP in net new revenue through 2034 under conventional scoring.
Related Articles:
State of U.S. Tariffs: August 7, 2025— The Budget Lab estimates U.S. consumers face an overall average effective tariff rate of 18.6%, the highest since 1933, falling to 17.7% after consumption shifts away from tariffed goods. The 2025 tariffs are projected to raise $2.7tn over 2026-35, or $2.2tn after $475bn in negative dynamic revenue effects.
Trump’s Tariffs Are Making Money. That May Make Them Hard to Quit— Tariff revenue may make future administrations of either party reluctant to roll back tariffs, since repeal would add to the federal debt and replacing the revenue with other taxes would require a politically risky vote in Congress. Democrats may also be tempted to use tariff revenue to fund new social programs.
Rapidly Growing Treasury Supply Crowding Out Other Types of Credit Growth— Roughly half of all fixed income issuance coming to market over the past year has been US Treasuries, meaning investors must allocate a growing share of dollars to financing the government. The argument is that lower government debt would free up more funds for consumer borrowing and business investment.
AI Summary.Only about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, yet the U.S. has created nearly 250 companies worth over $10bn ($30tn in value) against Europe's 14, and median U.S. disposable household income is 25% above Germany's. The author argues expanding high-skilled immigration is the fastest way to accelerate growth.
Edward ConardWall Street Journal
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My WSJ OpEd argues that mining the technological frontier motivates America’s talent to take more risk by increasing expected after-tax payoffs, producing a 70X difference in the value of newly created companies—laughably missed by tax elasticity studies.
How does the US outgrow Europe despite weaker test scores?
Core argument: OECD data show about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, while Germany's split is nearly even at 18% high and 20% low.
Economists never cite one of the most significant statistics about the U.S. economy. According to data released last week by the Organization for Economic Cooperation and Development, only about 12% of Americans score at the highest levels on internationally administered academic tests, while 34% score at the lowest levels—nearly three low scorers for every high scorer. Germany’s figures are nearly even: 18% score at the highest levels and 20% at the lowest. Put another way, Germany’s ratio of high to low scorers is almost three times America’s. Scandinavia’s is five times; Japan’s, seven.
These enormous differences have profound economic implications. With more talent and fewer needy people, is it any wonder that Northern European countries can afford more-generous welfare policies than their neighbors to the south?
Yet America excels relative to Europe despite these enormous differences. While Europe has created 14 companies worth more than $10 billion in the past 50 years, with about $400 billion of market value in total, Americans have created nearly 250 such companies, worth $30 trillion.
That success has driven up America’s middle-class incomes. The median disposable U.S. household income, according to the OECD, is now 25% greater than the median German household and 60% greater than the median household in Italy.
Europeans’ incomes would be even lower if they weren’t free-riding on American innovation, defense spending and higher drug prices, which incentivize research. America’s median incomes would be higher if we had more talent devoted to supervising and creating jobs for blue-collar workers or Northern Europe-like distribution of test scores.
The outsize success of America’s talented entrepreneurs doesn’t stem from their superior intelligence. It comes from working at companies such as Google and Microsoft, which mine the technological frontier and expose employees to valuable knowledge, insights and opportunities. Apple is worth more than the 30 largest German companies combined. Apple’s employees and its alumni use their knowledge and training to create more value than their counterparts in Europe.
Unlike Europe, the enormous success of American entrepreneurs motivated an army of talented Americans to get valuable on-the-job training, work longer hours, take risks and succeed. A small amount of success bubbles up from a large pool of failure.
The belief that taxing success more heavily will scarcely slow inevitable progress ignores the importance of being first to market and founding successful companies in America rather than the rest of the world, the enormous difference in the training and expected payoffs for successful risk-taking that it creates for America’s talented workers, and the motivational effect higher expected payoffs for successful risk-taking have on our talented workers.
Studies of short-term tax elasticity laughably miss the enormous difference between the success of the U.S. and Europe. Even if Europe cut its tax rates, it would have a trivial short-term effect on the expected returns to risk-taking, because without companies such as Google, entrepreneurs wouldn’t come up with ideas worthy of investment regardless of the tax rate. It takes decades of successful risk-taking to create companies and workers who can spawn the next generation of success.
The argument that we can heavily tax the tail of the distribution of payoffs without discouraging prudent risk-taking—since entrepreneurs such as Bill Gates and Steve Jobs took risks without expecting the enormous success they achieved—fails to recognize that outsize payoffs at the tail of the distribution critically drive overall expected risk-adjusted returns above break-even. Even with these successes, the returns to venture capital over the last 20 years have been mediocre at best.
When entrepreneurs capture as little as 5% of the value they create for others, it makes little sense to encourage successful risk-takers to quit working long before they achieve outsize success. With the effect technological success has on the productivity of talented American workers, who are our constraint to growth, and the effect of their productivity on the growth of middle-class incomes relative to Europe, that’s not a “policy failure.”
The fastest way to accelerate America’s growth and increase tax revenues is to let high-skilled immigration expand our talent pool. Forty percent of America’s billion-dollar startups were founded by high-skilled immigrants—roughly the same percentage of STEM doctorates held by foreign-born American workers.
Takeaways by Macro Roundup® AI
OECD data show about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, while Germany's split is nearly even at 18% high and 20% low.
Europe created 14 companies worth more than $10 billion over the past 50 years, totaling about $400 billion in market value, against nearly 250 such U.S. companies worth $30 trillion, with Apple alone worth more than Germany's 30 largest companies combined.
Median disposable U.S. household income is 25% above Germany's and 60% above Italy's, and expanding high-skilled immigration is argued to be the fastest way to accelerate U.S. growth, given that 40% of America's billion-dollar startups were founded by high-skilled immigrants.
Related Articles:
The Economics of Inequality in High-Wage Economies— Information technology created investment opportunities exceeding the supply of properly trained talent, while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics eased constraints on low-skilled labor and risk-averse savings. The author argues this framework, rather than rising cronyism, explains high returns to success, slowing productivity growth, and low interest rates.
The Future of European Competitiveness – A Competitiveness Strategy for Europe— A European Union competitiveness report attributes the EU's labour productivity growth gap with the US largely to weaker activity in information and communications technology and large-scale digital services; excluding main ICT sectors, EU productivity was broadly at par with the US from 2000-2019. It estimates Europe's investment share must rise about 5 percentage points of GDP.
A Visualization of Europe’s Non-Bubbly Economy— The Draghi report notes that no European Union company with a market capitalization above €100bn was founded from scratch in the past fifty years, while all six US companies valued above €1tn were. The 13 EU companies founded in that period and worth at least $10bn total about $400bn, versus nearly $30tn for their US counterparts.
AI Summary.The authors find the 2017 US business tax cuts reduced corporate tax revenue by 40% while raising total tangible corporate investment by about 11%, with firms facing larger tax declines investing relatively more. They estimate long-run GDP is higher by under 1% and labor income by under $1,000 per employee.
Gabriel Chodorow-Reich, Owen Zidar and Eric ZwickNational Bureau of Economic Research
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.@gchodorowreich @omzidar and Eric Zwich conclude that the 2017 Tax Cuts and Jobs Act raised tangible corporate investment by about 11%, but long-run GDP by less than 1% while reducing corporate tax revenue by 40%.
How much did corporate tax cuts raise investment, GDP, and wages?
Core argument: Corporate tax revenue fell 40% following the 2017 Tax Cuts and Jobs Act, due to the lower rate and more generous expensing of investment.
We assess the business provisions of the 2017 Tax Cuts and Jobs Act, the biggest corporate tax cut in US history, [building] on empirical work since the passage of the 2017 legislation. We describe not only partial equilibrium results, but also aggregate effects on investment, tax revenue, and GDP, [focusing] on domestic effects. Corporate tax revenue fell by 40% due to the lower rate and more generous expensing [of investment]. In aggregate, we suggest a loose consensus from the literature [based on three different methodologies],that total tangible corporate investment increased by 11%. Firms with larger declines in their effective tax wedge increased investment relatively more. The business tax provisions increased economic growth and wages by less than advertised by the Act’s proponents, with long-run GDP higher by less than 1% and labor income by less than $1,000 per employee. Some of the expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than others. By contrast, the tax cuts to pass-through firms look quite unattractive: they are especially expensive in terms of how much investment they encourage.
Takeaways by Macro Roundup® AI
Corporate tax revenue fell 40% following the 2017 Tax Cuts and Jobs Act, due to the lower rate and more generous expensing of investment.
A loose consensus from the literature, based on three different methodologies, suggests total tangible corporate investment increased by 11%, with firms seeing larger declines in their effective tax wedge increasing investment relatively more.
The 2017 law's business provisions increased growth and wages by less than its proponents advertised, with long-run GDP higher by less than 1% and labor income by less than $1,000 per employee.
Related Articles:
Tax Policy and Investment in a Global Economy— Using administrative tax data, the authors estimate that firms experiencing the mean corporate tax change under the 2017 US tax law increased investment by 20% relative to firms with no change, with long-run domestic and total capital up 7% and 13%. They find higher depreciation deductions largely offset added revenue from capital accumulation.
Making the Tax Cuts and Jobs Act Permanent: Two Revenue-Neutral, Pro-Growth Options for Tax Reform— Following the 2017 US tax law, real economic output, consumption, business investment, and payrolls grew faster than pre-law forecasts and nearly matched post-law projections, and an analysis of administrative corporate tax return data estimates firms with the average tax change raised domestic investment about 20% relative to firms with no change.
End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns— The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.
AI Summary.A wealth tax applies to net assets regardless of the return earned, making it equivalent to taxing an assumed rather than actual flow of capital income. As a result, effective tax rates on returns fall as returns rise and climb toward infinity as returns approach zero, with tax still owed on loss-making assets.
Shafik Hebous, Alexander Klemm, Geerten Michielse and Carolina Osorio-BuitronInternational Monetary Fund
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The IMF argues that a well-designed tax on income from capital, at a lower rate than labor income, would be less distortive and more equitable than a wealth tax if countries seek to raise more revenue from the rich.
How does a wealth tax affect effective tax rates across returns?
Core argument: A wealth tax of 1¼ percent is equivalent to a 25 percent capital income tax only for assets yielding a 5 percent return, since a wealth tax effectively taxes an assumed rather than actual flow of capital income.
One option that is increasingly being discussed is taxing the stock of net wealth directly. Moving from capital income to wealth taxes raises the question of how they differ at a fundamental level. The key difference is that the former is applied on a flow and the latter on a stock: a wealth tax is imposed on the net wealth (assets minus liabilities) of individuals, irrespective of the return. Wealth taxes are thus equivalent to taxing a fixed rate of return, that is, an assumed rather than the actual flow of capital income. This implies that high-yielding investments bear light taxation (in percent of the income), while low-return investments—including loss-making ones—are taxed heavily under a wealth tax. Figure 7 provides an illustration of the taxation of an asset through a wealth or a capital income tax, where the hypothetical income tax rate is 25 percent and the wealth tax rate is 1¼ percent. With these tax rates, they are equivalent for assets yielding a return of 5%. The figure shows how effective tax rates on returns decline as the return rises. Even more strikingly they rise for very low returns, tending to infinity as returns approach zero. And they would still be collected on loss-making assets.
Takeaways by Macro Roundup® AI
A wealth tax of 1¼ percent is equivalent to a 25 percent capital income tax only for assets yielding a 5 percent return, since a wealth tax effectively taxes an assumed rather than actual flow of capital income.
Under a wealth tax, effective tax rates on returns decline as returns rise and rise for very low returns, tending to infinity as returns approach zero, and the tax is still collected on loss-making assets.
The fundamental difference between capital income and wealth taxes is that the former applies to a flow while the latter applies to the stock of net wealth—assets minus liabilities—irrespective of the return earned.
Related Articles:
Taxing Top Wealth: Migration Responses and Their Aggregate Economic Implications— Swedish data show that when a wealth-taxed entrepreneur emigrates, employment at their businesses falls 33%, value-added 34%, tax payments 50%, and investment 21%, but 60% of closed firms are absorbed by other domestic companies. The authors estimate aggregate effects on employment and investment are small.
Behavioral Responses to State Income Taxation of High Earners: Evidence from California— A California ballot measure raising top marginal income tax rates by up to 3 percentage points prompted an additional 0.8% of the affected tax base to leave the state, with an estimated income elasticity of 2.5–3.2 for high earners who stayed. The authors estimate these responses eroded 45.2% of windfall revenues within one year and 60.9% within two.
Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy— The authors estimate that US billionaires move to states without estate taxes as they age, with $80.7bn of Forbes 400 wealth escaping estate taxation as a result. They find that for the average state the added estate tax revenue exceeds forgone income tax revenue by 31%, with California a notable exception.
