Income Tax Strategies Proposed by Some Presidential Candidates Could Backfire Says University Of Miami Study

CORAL GABLES, Fla., April 19, 2016 /PRNewswire-USNewswire/ -- Increasing U.S. taxes of American households making more than $52,000 per year, those above the median income level, could be a big mistake, as it will hurt the health of the economy, according to a new study from the University of Miami School of Business Administration. This is because, according to the study, increasing taxes for this group would reduce small business activity and spending, therefore decreasing economic growth. Conversely, decreasing taxes for those below the median income level of $52,000 would increase work and consumption demand and therefore improve economic growth.

For the first time ever, the study looked at nearly 30 years of state-level tax filings and economic indicators for their effect when compressed by taxation, and found:

• Households that make at least $52,000 will work fewer hours if their taxes increase, which has a negative effect on the economy. Further, small business activity and resulting job creation also declines if taxes for above median households is increased;
• Households that make less than $52,000 will work harder if their taxes decrease because they will be encouraged to work more and keep more of their earnings leading to higher consumption as well.

"One of the most heated debates among U.S. politicians and voters is how to create fair tax policies for the country's highest and lowest earners that would most benefit economic growth, and our study finds that the U.S., rebounding from the financial crisis, would suffer if we only increase taxes for those above the median income line," said Indraneel Chakraborty, assistant professor of finance at the University of Miami School of Business Administration, who conducted the study along with researchers from the University of Chicago and the University of North Carolina. "This is because increasing taxes of only the country's richest would cause a reduction in labor supply, meaning the amount of hours people will work will lessen. If the richest can't afford to pay workers well, and workers will only work less at lower rates, economic growth will suffer. The only way to reduce income inequality while encouraging U.S. economic growth is through properly balanced tax policies."

Republican presidential candidate Donald Trump's income tax policy states that those who are single and earn less than $25K a year, or are married and jointly earn less than $50K a year, will not owe any income tax. Households with higher income than this will get a simpler tax code with four brackets—0 percent, 10 percent, 20 percent, 25 percent —instead of the current 7 percent. Those who earn the most money, therefore, will pay the most taxes.

Democratic presidential candidate Hillary Clinton has yet to detail her income tax policy in full, but as it relates to the research, her proposal would only affect the top 5 percent, those who make approximately $400K a year. Both Clinton and Trump aim to alleviate middle and low-income individuals of certain taxes, which will help according to the findings in this study.

"Income taxation to relieve inequality is a double-edged sword," continued Chakraborty. "Government policies aim to reduce income inequality through tax policy but such policy can also cause lower economic growth. Our findings underscore to policy makers, and the public who votes for them, the need to understand the balance between these opposing effects in order for maximum economic growth to occur."

To view the full study, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2595524.

About the University of Miami School of Business Administration
The University of Miami School of Business is a leader in preparing individuals and organizations to excel in the complex, dynamic, and interconnected world of global business. One of 12 schools and colleges at the University of Miami, the School offers undergraduate, master's, doctoral, and executive education programs. With its location in a major center for international business, the School is acclaimed for its global perspective, student and faculty diversity, and engagement with the business community. More information about the University of Miami School of Business can be found at www.bus.miami.edu.

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SOURCE University of Miami School of Business Administration

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