Looking at the Economic Risks from Much Higher Taxes

 

Nearly doubling top tax rates is hardly a risk-free policy proposal. Of course that is not the impression being given by some policymakers pushing the idea. But even a cursory survey of economic opinion reveals big tax hikes come with trade-offs, just like pretty much any other policy idea.

For instance: A recent UChicago-IGM Forum survey found that 63 percent of economists surveyed (with responses weighted by each scholars confidence level) “disagreed” (52 percent) or “strongly disagreed” (11 percent) with the notion that a 70 percent top rate “would raise substantially more revenue … without lowering economic activity.” On the other side, 17 percent “agreed” and 4 percent “disagreed.”

Taxes matter. Tax rates matter. Incentives matter. In “Taxing Top Earners: A Human Capital Perspective” from Georgetown University, researchers find that the “revenue maximizing top tax rate in the US is approximately 49 percent” — not 70 percent or higher — because “an increase in the top tax rate reduces the benefit of skill investment but not the cost of skill investment. Thus, the skills of top earners fall.”

Or as one of the paper’s authors, Mark Huggett, has explained, “Suppose you’re a 25-year old in medical school, and considering taking on a medical specialty that might involve many years of hard work and lower earnings. Yet, you also know that once you become a great doctor, you will be compensated very well. … If you learn that the top tax rate increased from 42.5 percent to 73 percent, you may decide taking on that medical specialty is not a good decision.”Now imagine that thought process taking place across a $20 trillion economy of more than 300 million people. Maybe something for policymakers to consider. Also worth checking out is this Tax Foundation summary of research regarding taxes and economic growth. And “Should the Top Marginal Income Tax Rate Be 73 Percent?” by several of my AEI colleagues provides a great overview of the deeper economic issues surrounding the prospect of much higher tax rates.

There are 5 comments.

  1. Fake John/Jane Galt Coolidge

    I think any amount over $100,000 should be taxed at 95%. The bastages have it coming.

    • #1
    • February 6, 2019, at 5:18 PM PDT
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  2. OccupantCDN Coolidge

    I think this is an example of how the left looks at a data point, develops a policy talking point, and then never re-examines the data to re-think their policies.

    They use the example of the great economic expansion and high taxes that co-existed in the 1950s and 1960s at the core of their economic arguments. The US experienced the great economy with high growth and high taxes because the world had not yet recovered from WW ii. The industrial base of North America survived the war intact, with the rest of the industrial world was in ruins. The US could follow the worst possible economic policies and because there was a lack of competition for manufactured goods could have a export led miracle economy.

    Once the rest of the world recovered, started in the 60s and 70s the effects of bad policies started to be felt. rising unemployment, stagflation, etc.

    • #2
    • February 6, 2019, at 5:36 PM PDT
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  3. DonG Coolidge

    I think California still has an income tax rate of 13.3%. That is about half of what remains after the 73% federal rate proposed. A total of 86%, which is nuts. 

    Politicians *love* high rates, because they make special deductions much more valuable–valuable to “sell” to special interest groups and lobbyists.

    • #3
    • February 6, 2019, at 6:50 PM PDT
    • 3 likes
  4. Old Bathos Member

    DonG (View Comment):

    Politicians *love* high rates, because they make special deductions much more valuable–valuable to “sell” to special interest groups and lobbyists.

    Exactly. And those special provisions are like investments that keep yielding benefits. Senior members on the right committees can approach trade group lobbyists every two years:”Nice little [exemption/allowance/credit/deduction] you’ve got there. Would be a shame if something happened to it …” 

    The pre-Reagan tax code was a massive extortion racket. And a lot of members wish it were back for just that reason.

     

    • #4
    • February 7, 2019, at 7:53 AM PDT
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  5. Ward Robles Member

    All of the above. Plus, we desperately need a reform alternative to rally behind beyond tinkering with tax rates and a few deductions.

    • #5
    • February 10, 2019, at 7:56 AM PDT
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