Raising taxes on the rich doesn't make them less productive -- except when it comes to avoiding taxes, according to a new paper.
The study, by the Economic Policy Institute, a left-leaning research organization, finds the politically popular strategy of broadening the tax base while lowering tax rates may not be the best way to boost revenue. A better way to use the tax code to raise revenue, according to EPI, would be through a combination of raising taxes on income earned through capital gains and adding more tax brackets with higher rates for those upper-upper-income households.
That's because rich households tend to respond to tax increases by shifting their money into categories that are less taxed, such as capital gains. Wealthy people -- for example, Republican presidential candidate Mitt Romney -- are much more likely to benefit from these low tax rates because a larger share of their income can be reclassified as investments, according to the study.
“There’s more flexibility” for reporting capital gains income, Andrew Fieldhouse a federal budget policy analyst at EPI who authored the paper, explained to The Huffington Post. “Most people don’t have the option of reclassifying their income from work as tax-preferred investment income.”
The findings run counter to the argument of many low-tax advocates that raising taxes on the rich would hurt economic activity because it would push them to spend and invest less.
When tax rates go up, wealthy households don’t change the number of hours they work any more than middle-income households do, Fieldhouse said. Instead, he said, “You just see big changes in their reported taxable income."
In a New York Times op-ed last year, famous very rich man Warren Buffett debunked the notion that America’s rich would invest less if faced with the possibility of paying more in taxes.
“Let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if -- gasp -- capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities,” Buffett wrote.