The Single Income Tax - The 2020 Tax Commission

modest elasticities – as conventionally measured – can be consistent with large
welfare costs of taxation.”
For women the picture is far more drastic though, as “most studies find large
labor supply elasticities, especially on the participation margin.” In particular,
estimates that “allow for dynamic effects of wages on fertility, marriage, education
and work experience” are “generally quite large.”349
Marginal tax rates also appear to affect corporate behaviour. For example, high
tax rates on dividends lead to less being paid. Chetty and Saez studied the effect
of the cuts in the tax on dividends in 2003, from a top rate of 35 per cent to 15 per
cent. They found that the share of publicly traded firms paying dividends began to
increase precisely from 2003, after having declined continuously for more than two
decades. They reported that “nearly 150 firms have initiated dividend payments after
the tax cut, adding more than $1.5 trillion to aggregate quarterly dividends. Most
of these firms initiated regular, recurrent payments rather than one-time ‘special’
distributions.” They also found that many firms that were already paying dividends
increased the amount they paid significantly after the tax cut.350
The effects of marginal tax rates on growth and corporate behaviour are sufficient
to produce changes in asset prices. Sialm found a statistically significant
relationship between asset valuations and personal tax rates. Lower taxes are
associated with higher share prices and the “result is consistent with the observation
that stock and bond returns tend to be higher in periods when taxes decrease and
lower when taxes increase”.351
As the economic harms created by high marginal tax rates are so severe, tax
reform that reduce them can lead to significant economic improvements. Engen and
Skinner found that a “major tax reform reducing all marginal rates by five percentage
points, and average tax rates by 2.5 percentage points, is predicted to increase long
term growth rates by between 0.2 and 0.3 percentage points.”352
4.1.2.2. Higher corporate tax rates reduce investment, innovation and
economic growth
The academic literature strongly suggests that excessively high rates of Corporation
Tax lead to declining economic activity and lower tax revenue than might be generated
through lower marginal rates. Djankov et al. performed a study on 85 countries
(including the developing world) to find that:353
A 10 percentage point increase in the effective corporate tax rate reduces the
investment to GDP ratio by about two percentage points (mean is 21 per cent),
and the official entry rate by 1.3 percentage points (mean is eight per cent).
Felix estimates that, for the US economy, if Corporation Tax is increased by one
percentage point, the marginal burden on labour is 4.2 times higher than the additional
revenue collected through Corporation Tax. In other words, focusing taxes
349. Keane, M. P. Labor Supply and Taxes: A Survey, University of Technology Sydney Working Paper No.
160, July 2010
350. Chetty, R. & Saez, E. Do Dividend Payments Respond to Taxes? Preliminary Evidence from the 2003
Dividend Tax Cut, NBER Working Paper No. 10572, 2004
351. Sialm, C. Tax Changes and Asset Pricing: Time-Series Evidence, NBER Working Paper No. 11756,
2005
352. Engen, E. M. & Skinner, J. S. Taxation and Economic Growth, NBER Working Paper No. W5826,
1996
353. Djankov, S., Ganser, T., McLiesh, C., Ramalho, R. & Shleifer, A. The effect of corporate taxes on
investment and entrepreneurship, NBER, 2007
TaxPayers’ Alliance | Institute of Directors 199