Do higher income taxes on top earners trickle down? A local labor markets approach

Abstract

This paper measures how much higher income taxes on U.S. top 1% earners “trickle down” and reduce other workers’ wages via geographically concentrated spillovers. Using an exposure design that combines time-series variation in the federal marginal tax rate for top 1% earners with cross-sectional variation in the top 1% income share across local labor markets, I find very little evidence of local trickle-down effects. The point estimates imply zero local trickle-down effects. At conventional levels of confidence, the estimates are statistically inconsistent with a one percentage point increase in the top tax rate reducing worker wages by more than −0.08%. These results undermine claims that trickle-down effects should be an important consideration in setting top tax rates.