Akcigit et al. found that personal income taxes have a significant negative impact on the likelihood of patenting. Taxes also affected the likelihood that an inventor would create a frequently cited patent or patent that creates significant value for the business. In addition, inventors are significantly less likely to move to states with higher taxes. While commercial inventors typically only respond to corporate income tax, inventors who do not work for a company consider both corporate and income taxes. In addition, personal income tax generates both geographical mobility and responses to innovation production. When Republicans led by Newt Gingrich took control of the House of Representatives in 1994, they ran on a platform known as the Treaty with America. The provisions included commitments to reduce taxes, reduce the size of the federal government and reform the social assistance system. By 1997, unemployment had fallen to 5.3 percent and Republicans passed the Taxpayer Relief Act. Clinton initially opposed the bill, but eventually signed it. The federal tax system relies on a set of taxes to generate revenue. By far the largest source of money is income tax, which is paid by individuals, estates and trusts.
In 2018, the Internal Revenue Service (IRS) collected $1.57 trillion net in income taxes, or 52.4% of the total. Income tax is levied on wages, interest, dividends and capital gains. Ordinary income rates are marginal on the basis of income, while long-term capital gains are given preferential treatment. Compliance with tax laws is important to keep the system functional for everyone and to support programs and services that improve quality of life. One way to encourage compliance is to keep the rules as clear and simple as possible. Overly complicated tax systems are associated with high levels of tax evasion. High tax compliance costs are associated with larger informal sectors, increased corruption and reduced investment. Economies with simple and well-designed tax systems can boost business activity and, ultimately, investment and employment.11 New research shows that an important determinant of business entry is the ease of paying taxes, regardless of the corporate tax rate. A study of 118 economies over a six-year period found that a 10% reduction in the tax administrative burden – measured by the number of tax payments per year and the time it takes to pay taxes – resulted in a 3% increase in annual entry rates for businesses.12 The main effects of the Tax Cuts and Jobs Act have been lower government revenues and regressive tax cuts for enterprises.
Shareholders and high-net-worth executives who bear almost the entire burden of corporate taxes, even if the tax changes have had little impact on business investment or workers.18 Low tax compliance costs and efficient procedures can make a significant difference to businesses. In Hong Kong SAR, China, for example, the standard case study firm would only have to make three payments per year, the lowest number of payments in the world. In Qatar and Saudi Arabia, it is expected to make four payments, which remains among the lowest in the world. In Estonia, compliance with income tax, value added tax (VAT) and taxes and contributions on labour takes only 50 hours per year, or about 6 working days. Economic activity reflects a balance between what people, businesses and governments want to buy and what they want to sell. In the short term, demand factors play a major role. In the long run, however, supply plays a decisive role in determining economic potential. Our production capacity depends on the size and skills of the workforce; the quantity and quality of machinery, buildings, vehicles, computers and other physical capital used by workers; and the stock of knowledge and ideas. A personal income tax (or income tax) is levied on wages, salaries, investments or other forms of income earned by an individual or household. The United States imposes a progressive income tax, where rates increase with income. The federal income tax was introduced in 1913 with the ratification of the 16th Amendment.
Although barely 100 years old, personal income tax is the largest source of tax revenue in the United States. These findings apply to the current debate on progressive income tax amendment to the Massachusetts Constitution, which will be put to a vote in November. The additional tax may generate more revenue for the government, but the studies reviewed in this paper suggest that the effect may be relatively short-lived and costly.
