New York Times, Would a Higher Top Tax Rate Raise Revenues?, by Bruce Bartlett:
On Friday, Prof. Allan Meltzer of Carnegie Mellon University, a well-known conservative economist, offered a commentary in The Wall Street Journal arguing against policies to equalize the distribution of income…. [But] hhe seems to have missed an important implication of his own conclusion.
If the rich are going to continue to get richer in low-tax countries and high-tax countries alike, then it must mean that high tax rates have far less of a disincentive effect on the rich than conservatives like Professor Meltzer continually proclaim. …
[T]here is another very good reason to raise taxes on the ultrawealthy: the government needs the revenue. … In the real world, it is impossible to balance the budget with revenues at 16.4% of GDP. Therefore, taxes will have to rise. The only question is who will pay more? ….
Republicans, however, are quite adamant that not only must the wealthy not pay any more in taxes – but, in fact, must have their taxes further reduced. Every Republican presidential candidate favors lower taxes on the wealthy. Mitt Romney, for example, has proposed cutting the top income tax rate to 28% from 35 %. …
A common reason given by conservatives for why tax rates must not be increased is that the government won’t get much, if any, additional revenue and might even get less due to the Laffer Curve. If tax rates are too high, they say, the rich will stop working and investing in job-creating businesses and instead spend all their time vacationing and seeking out tax shelters. Therefore, revenues will fall.
However, one never sees conservatives cite any empirical evidence in support of their contention. It is simply asserted as self-evident that the rich will go on strike, as they did in Ayn Rand’s famous novel, “Atlas Shrugged,” even though the nation clearly did quite well during times when the top income tax rate was far higher than it is now.
The reason for the conservative reluctance to estimate the revenue-maximizing top tax rate is that academic research generally shows that it is much, much higher than the current top rate or any that has been proposed by the Obama administration. The two latest studies are these:
- A National Bureau of Economic Research working paper published in November by Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva found virtually no supply-side effect from cuts in the top tax rate since 1975. That is, there was no significant increase in output resulting from them; hence there would be little negative output effect from raising the top rate. Consequently, the revenue-maximizing top rate may be as high as 83%, they estimate.
- A National Bureau of Economic Research working paper published last month by Christina Romer and David Romer estimates that the revenue-maximizing rate is 84 percent. Even assuming a higher response by the wealthy to earning income – something economists call elasticity – than the Romers believe is likely, the top rate could still rise to 73% before a Laffer curve effect set in.
No one is suggesting that the United States go back to the top rate of 50 percent that prevailed during most of Ronald Reagan’s administration, let alone the 91 percent rate of Dwight Eisenhower’s. But it’s clear that there is going to be continuing pressure to raise rates on the wealthy as long as the budget deficit remains a problem.
If, as Professor Meltzer has shown, the rich get richer regardless of the tax rates, there is no economic reason not to raise the top rate. Perhaps unwittingly, his research confirms that of other economists who say that we could get substantial additional revenues even if the top rate doubled.
(Hat Tip: Bill Turnier.)
