Our findings on the effects of growth and unemployment provide evidence against supply side theories that suggest lower taxes on the rich will induce labor supply responses from high-income individuals (more hours of work, more effort, etc.) that boost economic activity (see standard models of optimal labor income taxation in Saez, 2001 and Piketty and Saez, 2013).
Relatedly, they also show little support for the influential political–economic idea that tax cuts for the rich ‘trickle down’ to boost wider economic performance (Sowell, 2012). They are, in fact, more in line with recent empirical research showing that income tax holidays, windfall gains and tax cuts targeted at the top decile of the income distribution do not lead individuals to significantly alter the amount they work (Akee et al., 2010; Jones and Marinescu, 2018; Martínez et al., 2021; Zidar, 2019).
Overall, our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment. We employ a measure of top 1% share of pre-tax national income that includes both labor and capital income, which makes it less likely that tax shifting and avoidance are driving the results. In fact, our results are more in line with Piketty et al. (2014), who suggest that lower taxes on the rich encourage high earners to bargain more forcefully to increase their own compensation, at the direct expense of those lower down the income distribution.
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