NCPA - National Center for Policy Analysis

Taxing The Rich Yields Less Taxable Income

July 21, 2000

While soaking the rich has appealed to many government officials, a recent study suggests that this may decrease taxable income -- resulting in lower government revenue. The study analyzes the 1993 tax increase and draws several conclusions about the wealthy and the way they avoid paying higher taxes.

The study found that in anticipation of the 1993 tax hike, the top income earners on average:

  • Reduced take-home pay 14 percent.
  • Raised their average taxable income by $252,000 in 1992, then lowered it by $463,000 in 1993, after the tax hike.
  • Increased their non-taxed compensation by $11,000 in 1993, with stock options accounting for 90 percent to 95 percent of the change in taxable income.

The study concludes that the wealthy classes tried to get as much income as possible paid out before the tax increase and then shifted to other nontaxable methods of payment after the tax increase. These other methods were primarily stock options.

Source: Austan Goolsbee, "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, April 2000.


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