How can taxes affect peoples behavior

Because capital gains are only taxed when realized, taxpayers get to choose when they pay their capital gains taxes. That makes them extremely responsive to tax changes. Higher capital gains taxes cause investors to sell their assets less frequently, which leads to less taxes being assessed. We can see that when the capital gains tax rate was increased in , realizations fell dramatically and remained low for a decade.

When the tax rate on capital gains was cut in , realizations rose substantially. This should serve as a reminder to lawmakers that they ought to think carefully about the incentives they create through the tax code. The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work? We work hard to make our analysis as useful as possible.

Would you consider telling us more about how we can do better? For soda, the question is whether people who are high soda consumers continue to consume soda at the same rates, like cigarette smokers — or whether they actually switch to other beverages or reduce consumption overall. Those kinds of policies, too, can make more sense when you have these goods that are consumed more by poorer consumers. They can help dissuade people from consuming this stuff without actually taking money out of their pockets, right?

The idea is that less marketing would cause poorer consumers to drink less soda, without necessarily having to pay more for the soda they are drinking. Knowledge Wharton: Is there bias in this process in general? And that corrective benefit has to be weighed against the regressivity cost. Knowledge Wharton: Going back to the soda issue, what really has been the impact from the tax? That was an important piece to this. But one of the interesting questions going into this was to what extent the soda tax — which is actually imposed on the distributors who supply sodas to grocery stores — would be passed on to consumers in the form of higher soda prices.

On the one hand, sometimes people are dismayed to see taxes being passed through to consumers. In this case, having that tax passed through to the consumer and being front-and-center on the receipt might be consistent with the apparent goals of the policy. It could be a very important deterrent in this process.

Lockwood: It certainly could be. But if they stay there, and the tax ends up being fully passed on to consumers on into the future, I think it will be interesting to see if that actually helps with these benefits. Maybe this is the kind of thing that we should have been doing with cigarettes all along, really emphasizing how much the cost is increasing because of these taxes.

Knowledge Wharton: How much interest in this research topic is there from the medical community? Lockwood: I think the medical research community has a big part to play in this.

Although this is mostly a theory paper, it identifies the key parameters or estimates that will govern what that optimal tax is. A lot of that research can beneficially come from the medical community. Things like, how much more does medical care cost when people consume more sugar versus less? How much do people seem to be taking those costs into account when they are making their consumption decisions? Those are exactly the kinds of things that people are studying right now.

And as I said, we have some initial estimates. This caused a recession that lasted for about two years. But once inflation was brought under control, the economy began to grow rapidly and Reagan wanted to offset increased defense spending with reductions to entitlement programs, but that never happened. President Bill Clinton's tax policies provided insight into the impact of both tax increases and decreases.

The Omnibus Budget Reconciliation Act was passed in and it included a series of tax increases. During Clinton's presidency, the economy added approximately When the Newt Gingrich-led Republicans wrested control of the House of Representatives in , they ran on a platform known as the Contract with America. The provisions included commitments to reduce taxes, shrink the federal government, and reform the welfare system.

By , unemployment had dropped to 5. Clinton resisted the bill at first but ultimately signed it. While some economists believe that the tax cuts were better medicine for the economy, the second term for the Clinton administration had the benefit of the technology boom that produced the computer and Internet revolutions.

Many of the high-tech jobs created by that boom were lost when the Nasdaq cratered after Clinton left office, bottoming out in Oct.

One interesting data point is the relative stability of tax revenue as a percentage of GDP, regardless of the existing tax policies over time. According to the World Bank , during the period to , which encompassed both Reagan and Clinton, the tax revenue as a percentage of U. GDP hit a low of 9. This indicates that the best way to jump-start revenues is to grow the economy through stimulative tax policies. President Barack Obama consistently pushed for higher taxes on the rich to help reduce the deficit.

Later, President Donald Trump got a substantial tax decrease across the board, with the bulk of the cuts benefitting upper-income taxpayers. Nevertheless, the debate continues on whether or not higher rates actually result in more tax revenues. The problem is that changes in tax rates can't be analyzed in a static environment, although that's how politicians tend to view them.

The fact is that changes in rates alter behavior and most taxpayers will do whatever it takes to minimize their tax burden. It's easy to find evidence supporting contrary positions, but there's a problem when analyzing historical data.

We'll never know what would have happened if the opposing position had been implemented during the same time frame and under the same conditions. Predictably, those on the political right estimate this rate to be much lower than do those the left.

The paper also finds that taxes generally have less effect on behavior than previously thought. What separates this study from others of its kind is that it looks at tax rates in the period between the two world wars, as opposed to more recent times. The advantage of this approach is that there were many changes in the marginal tax rates during this time, giving researchers many opportunities to study how those changes effect citizen behavior.

In addition, the income tax regime during this period was much more progressive than it is now.