Title: Tax progressivity, economic booms, and trickle up economics
Authors: Christopher Otrok - University of Missouri and FRB St Louis (United States) [presenting]
Michael Owyang - Federal Reserve Bank of St Louis (United States)
Laura Jackson Young - Bentley University (United States)
Abstract: An increase in tax progressivity sets off an economic boom. Those at the bottom of the income distribution (who are constrained hand to mouth consumes) set off a consumption boom that expands the overall economy. Those at the top of the income distribution disproportionality benefit from expansions, and their income gains from the boom more than offset the increases in tax from higher marginal rates. The empirical results show that aggregate income and consumption rise after an increase in progressivity. At the same time the income Gini rises (as do other inequality measures comparing percentiles of income). We interpret these results as evidence in favor of tickle up, not trickle down, economics. Such a policy also has no impact on deficits and raises the tax revenue to GDP ratio in the longer run, which we interpret as due to the economic expansion. A methodological novelty is a new measure of income tax progressivity. We propose a method to decompose changes in the tax structure into a component measuring the level of taxes and a component orthogonal to the level that measures progressivity. While the focus is on the progessivity results, we find that the level shock is similar to the standard tax shocks that are found in the empirical literature in that a rise in the level is contractionary.