The Utilitarian Math Says: The Top 1% Should Pay an 80% Marginal Rate: Emmanuel Saez and Thomas Piketty: Noted

TheUtilitarianMathSays: TheTop 1% ShouldPayan 80% Marginal Rate: EmmanuelSaezandThomasPiketty: Noted

EmmanuelSaezandThomasPiketty: Whythe 1% shouldpaytaxat 80%:

In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled, from less than 10% in the 1970s to over 20% today (pdf). A similar pattern is true of other English-speaking countries…. Other OECD countries… have seen far less concentration of income among the mega rich. At the same time, top income tax rates on upper income earners have declined significantly since the 1970s in many OECD countries–gain, particularly in English-speaking ones…. At a time when most OECD countries face large deficits and debt burdens, a crucial public policy question is whether governments should tax high earners more. The potential tax revenue at stake is now very large….

We analyse this issue both conceptually and empirically using international evidence on top incomes and top tax rates since the 1970s…. There are three scenarios to explain the strong response of top pre-tax incomes to top tax rates; each has very different policy implications. First, higher top tax rates may discourage work effort and business creation among the most talented…. If all the correlation of top income shares and top tax rates seen in the above data were due to such supply-side effects, the revenue-maximising top tax rate would be 57%…. Second, higher top tax rates can increase tax avoidance…. With sufficient political will and international co-operation to enforce taxes, it is possible to eliminate most tax avoidance opportunities…. Then… only real supply-side responses would limit how high top tax rate can be set before becoming counter-productive.

In the third scenario… top earners might be able to partly set their own pay by bargaining harder or influencing compensation committees…. Incentives for such "rent-seeking" are much stronger when top tax rates are low. In this scenario, cuts in top tax rates can still increase top income shares, but the increases in top 1% incomes now come at the expense of the remaining 99%. In other words, top rate cuts stimulate rent-seeking at the top but not overall economic growth….

To tell these various scenarios apart, we need to analyse to what extent top tax rate cuts lead to higher economic growth. Again, data show that there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s…. What that tells us is that a substantial fraction of the response of pre-tax top incomes to top tax rates may be due to increased rent-seeking at the top…. Rich countries have all grown at roughly the same rate over the past 30 years–in spite of huge variations in tax policies…. We find that the top tax rate could potentially be set as high as 83% (as opposed to the 57% allowed by the pure supply-side model)….

We have seen decades of increasing income concentration that have brought about mediocre growth since the 1970s. And with the Great Recession that was triggered by financial sector excesses, a rethink of the Reagan and Thatcher revolutions is underway…. In the end, the future of top tax rates depends on what the public believes about whether top pay fairly reflects productivity or whether top pay, rather unfairly, arises from rent-seeking. With higher income concentration, top earners have more economic resources to influence both social beliefs (through thinktanks and media) and policies (through lobbying), thereby creating some "reverse causality" between income inequality, perceptions, and policies. The job of economists should be to make a top rate tax level of 80% at least "thinkable" again.

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