That’s the view of some economists: They argue that higher taxes will not discourage the wealthy from working harder or slow the economy, unlike in Ayn Rand’s 1957 novel, “Atlas Shrugged.” Its hero, led a strike by industrialists and others against the government, partly because they thought they were too highly taxed.
The Top 1 percent earners now make 20 times the average, while they made only 10 times the average in the 1970s. If they worked hard then, they should continue working hard today, even if they are taxed at 50 percent. The top federal tax rate is now 35 percent.
The economists’ work is of more than just academic interest. The President’s former budget director has said that their research on income inequality helped to point the way for the administration in its pledge to rebalance the tax code. Senate Republicans last month blocked the president's plan to raise taxes on the rich via the so-called Buffet rule, arguing it would hurt the economy claiming that high marginal tax rates distort decisions to work, save, invest and start a business.
In France, the Socialist presidential candidate has called for a 75 percent tax on annual incomes of more than 1 million euros ($1.3 million), a proposal championed by a professor at the Paris School of Economics. Polls show him leading over the incumbent President in advance of May 6 elections.
‘Just Crazy’
The French professor asserts that the idea that we need to pay people many millions of euros per year to get them to work harder is just crazy.
He and a professor of economics at the University of California-Berkeley, agreed in a November 2011 paper that the rich do behave differently when their taxes are raised. They pursue financial strategies to reduce their taxable incomes and bargain for higher compensation, instead of cutting back on how much they work and save or becoming less entrepreneurial.
The man who won the 2010 Nobel Prize in economics, also sees little evidence that raising rates on the top 1 percent of income earners -- households making about $350,000 or more a year in 2010 -- would restrict growth.
‘Overwhelming Likelihood’
The overwhelming likelihood is that the revenue- maximizing federal tax rate is somewhere in the 50 to 70 percent range. If you are reluctant to overshoot, then you can only go up to 50 percent.
Lionized by Republicans, the late Ronald Reagan championed an across-the-board tax cut soon after he became president in 1981 that lowered the top rate to 50 percent from 70 percent. He subsequently pushed it to 28 percent as part of an overhaul of the tax code in 1986.
The economy actually grew faster in the 30 years before that tax cut than it did during the following three decades, according to experts. Gross domestic product per capita advanced at an average annual 2.2 percent rate between 1950 and 1980, compared with 1.7 percent between 1980 and 2010, their calculations show.
Internationally, advanced economies that have reduced top tax rates the most since 1975 haven’t shown a tendency to grow faster than those that cut less.
Data ignores such emerging-market economies as Brazil and India, which have lowered top tax rates and enjoyed faster growth than developed nations.
Brazil’s economy has expanded at an average annual pace of 3.6 percent since 2000, more than double the 17-nation euro area’s 1.4 percent.
The British government is worried enough about the economic impact of high taxes on the wealthy that it has said it will reduce its top rate to 45 percent next year from 50 percent now.
No government can justify a tax rate that damages our economy and raises next to nothing.
‘Reduced Work Effort’
It’s not only through “reduced work effort” by the rich that higher tax rates can hurt the economy. Stepped-up tax avoidance also can impede economic efficiency by diverting money and attention away from more productive purposes.
Such efforts -- which include taking more compensation in the form of tax-advantaged health-care benefits -- reduce revenue for the government and “increase deadweight losses” for the economy.
Very high top tax rates also may have long-run effects on growth that aren’t immediately discernible. New people coming into the labor force might decide it’s not worth it to try so hard to get ahead.
High taxes have depressed the labor supply in European economies, according to an expert economist, who argues that Americans generally work more hours because U.S. tax rates are lower. The result: U.S. inflation- adjusted GDP per capita in 2010 was about 40 percent higher than the average for the euro area, according to data from the Organization for Economic Cooperation and Development in Paris.
‘This is Nonsense’
Increases in top rates should be coupled with steps to close loopholes and broaden the tax base to limit the avoidance efforts Feldstein worries about.
Capital-gains taxes should be raised as well. That would discourage business leaders from trying to take more of their compensation in shares, rather than salary, to avoid paying higher income-tax rates. The top U.S. rate on long-term gains is 15 percent.
Taxes on capital and labor income earned by the wealthy “don’t have to match, but they should move together and shouldn’t be too far apart.
Hurt the Market
An increase would hurt the stock market and the economy. Because evidence suggests that higher dividend- and capital-gains taxes are capitalized in equity values, increasing those tax rates will reduce stock prices and the wealth of millions of Americans. A rise would discourage investment, leading to lower productivity, wages and output.
Based on data from tax returns, economists have concluded that the top 1 percent of U.S. earners have more than doubled their share of income during the last half century, to about 20 percent in 2010 from less than 10 percent in the 1970s.
The research says more about fluctuations in earnings reported for tax purposes in response to changes in the tax code than it does about inequality.
‘Increasing Inequality’
The general trend is still toward increasing inequality.
The Congressional Budget Office said in an October report that the share of income received by the top 1 percent grew from about 8 percent in 1979 to over 17 percent in 2007.
In its calculations, the Washington-based CBO takes account of government transfer payments, primarily from Social Security, and company-paid health-insurance benefits.
Even after those adjustments, the rapid growth of income for the top 1 percent remains “a major factor” contributing to growing inequality, the CBO report said.
That’s reflected in the Occupy Wall Street protest movement’s motto, “We are the 99 percent,” and its calls for a more even distribution of wealth.
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