Contributor Post Created with Sketch. Time for Tax Cuts? “Trickle-down Economics” vs. “Spillover Effects”


My top public policy priority would not be big, fat tax cuts for the superrich. (At the same time, I don’t want to see marginal rates drift ever higher.)

Other sorts of pro-growth policy are more relevant right now, including regulation and education. But what would be the economic case for lower rates for the 0.1%?

One perspective can found over at the American Economic Association blog where Chris Fleisher features a Q&A with Carnegie Mellon University economists Laurence Ales and Christopher Sleet. Their recent American Economic Review paper argues that the the marginal tax rate on top earning CEOs should be closer to 20% vs. the current top tax rate of 40%. Here’s a bit from the exchange:

AEA: It’s a popular opinion to think that these top earners, for whatever reason, don’t pay their fair share. What did you find with your paper?

Sleet: We found that much lower rates are desirable. We’re talking about top tax rates of 20 to 30 percent. But it would depend on other aspects of tax policy. …The impact of taxing a CEO at a high rate, or higher rate, it has a relatively small effect in percentage terms on the profits of a firm. But because these profits are very very big, that translates into a very big dollar effect. And that impacts potentially tax revenues because they are taxable.

AEA: I was wondering if you could explain a little more about how the actions of a CEO, as it relates to however much they’re taxed, could have spillover effects and could really enhance the firm’s profits if they were able to keep more of the money that they earn.

Sleet: CEOs are exerting effort, they’re exerting time. It’s well-documented that many CEOs work extremely long hours and they are making high-level decisions. …We’re talking about deterring through taxes discouraging CEOs from putting in the extra effort that will lead them to make better decisions within their business that will lead to more profits.

Ales: Even if their response is really tiny, the fact that their effort is multiplied by the scale of the corporation, we quickly map that small change in effort in big change in profits and big change in tax revenues.

Keep in mind here that while the economists would tax CEOs less, they would tax corporate profits more. But what I find interesting is that they describe what many critics on the left deride as “trickle-down” economics. From Sleet: “It’s possible that CEOs through good decision making, end up creating more jobs by expanding their businesses, and that’s going to benefit the people that you’re describing directly, through employment opportunities, through wages and incomes.”

There are 9 comments.

  1. Manny Member

    I agree. Rates are reasonable right now. They could go lower, but given the deficit and debt, let’s pay it down. However, corporate tax rates need to come down to keep businesses in the USA. And entice capital back. That is the number one economic priority in my opinion.

    • #1
    • January 3, 2017, at 1:30 PM PST
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  2. I Walton Member

    I doubt that marginal rates on personal income have much effect on work and investment behavior once they’re no longer confiscatory. Confiscatory tax rates distort as earners try to avoid them. Corporate profits taxes in contrast should be eliminated entirely with profits taxed as ordinary income of share holders. The reason for this is to abolish the fiction that corporations pay taxes and to eliminate as well the distortions they cause as managers try to pump up capital gains for themselves and for growth. Trickle down, if it has any meaning at all must refer to government spending. It’s the trickle down from Feudal lords as they built things for themselves or for the village. Tax rates are not trickle down as they affect incentives which are almost by definition trickle up, or if too high, quash. The whole dialog about taxes is corrupted by Keynesian notions and by the absence of marginal analysis. We’ve lived and gradually died in this false narrative now for more than half a century. It’s time we sent all economist to reeducation camps where they’d be isolated from each other and water boarded by Austrian economists until they confess.

    • #2
    • January 3, 2017, at 2:22 PM PST
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  3. Pugshot Member

    I can see lowering CEO individual rates to 30-35% because 40% just seems confiscatory. But I’m not convinced that lowering tax rates for CEOs (who are – at least with respect to the largest corporations – grossly overpaid) will result in greater productivity by those individuals, let alone by the corporations as a whole. On the other hand, I think lowering corporate rates to something that approaches the bottom of the world corporate tax rate makes great sense. Left with more of their profits, corporations could either pay out more in dividends (helping investors – many of whom may be retirees) or they could invest more in R&D or in internal improvements that will increase productivity. Of course, stupid corporations could use the profits to increase executive compensation, but they’d pay for it in the market with decreased competitiveness.

    • #3
    • January 3, 2017, at 5:31 PM PST
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  4. Jamie Lockett Inactive

    Most CEOs that I work with don’t put in less work because their taxes are too high.

    • #4
    • January 3, 2017, at 6:17 PM PST
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  5. Mike H Coolidge

    If my wife and I started hitting the 25% tax bracket, I’d tell her to cut back her hours.

    • #5
    • January 4, 2017, at 6:05 AM PST
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  6. erazoner Coolidge

    James Pethokoukis:But what I find interesting is that they describe what many critics on the left deride as “trickle-down” economics. From Sleet: “It’s possible that CEOs through good decision making, end up creating more jobs by expanding their businesses, and that’s going to benefit the people that you’re describing directly, through employment opportunities, through wages and incomes.”

    The left uses such derision with great effect. It’s true that CEOs are often credited with job creation through their pro-growth business decisions. But “trickle-down” is the discredited theory that says low and middle earners benefit from the spending habits of the high earners. Thomas Sowell has repeatedly denounced use of the term, which the left claims the right uses to justify “tax cuts for the rich”. It’s a straw man that obfuscates the fact that high marginal rate reduction proposals are supported by many economists for multiple reasons, none of which include the so-called “trickle-down” effect.

    • #6
    • January 4, 2017, at 6:05 AM PST
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  7. David Foster Member

    I’m not aware of any provisions in the tax code that apply specifically to CEOs…am I missing something?

    Unless such a provision were added, then any tax policy changes affecting the tax rates for CEOs would also affect the tax rates for high-earning actors, athletes, musicians, lawyers, etc.

    Why is there so much obsession with CEO incomes specifically?…there are numerous ‘celebrities’ who get paid more than the man who runs GE or the woman who runs Xerox.

    A cynic might suggest that the obsession with CEO salaries is largely about distracting attention from the incomes of the political classes and their allies.

    • #7
    • January 4, 2017, at 8:25 AM PST
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  8. Z in MT Inactive

    This is a very odd argument. CEO compensation is very individualized and is often designed to be the most tax efficient, but the marginal effort of CEO’s has little to do with their marginal tax rate.

    • #8
    • January 4, 2017, at 11:02 AM PST
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  9. bridget Inactive

    As I understand it, the argument for lowering high marginal tax rates is that it will incent people to earn more. Sometimes that is through more work (for example, a physician or attorney taking on more patients or clients), or it would encourage people to take more strategic risks. The higher the marginal tax rate, the lower the payoff of a risky, but potentially very valuable for the company, proposition.

    To be a bit snarky, any percentage, no matter how large, of $0 is $0.

    • #9
    • January 4, 2017, at 1:48 PM PST
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