Top Income Tax Rate: How's 83% Sound?

Posted by: Dan Beucke on December 9, 2011 at 7:00 AM

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This should get Grover Norquist up off the couch: a paper by a prominent team of economists says the tax rate for top U.S. earners could be hiked to 83 percent without hurting anyone but the “mega rich.” And in what’s sure to add gasoline to the income-inequality debate, they suggest pay increases for the wealthiest few reflect mostly “rent seeking” — econo-speak for unshackled greed — rather than executive-suite productivity improvements.

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Thomas Piketty of the Paris School of Economics, Emmanuel Saez of Berkeley and Stefanie Stantcheva of MIT reach those conclusions after disputing that tax cuts in several countries since the 1970s had any real impact on per-capita GDP growth. As they say in their less wonky summary (hat tip to 3 Quarks Daily) — illustrated with the table at the right — “countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark.”

What does show a strong correlation is falling tax rates and the share of pre-tax income held by the top 1 percent — which has more than doubled in the U.S., to more than 20 percent, over the past 40 years. Piketty, Saez and Stantcheva offer three possible explanations for what happens after a tax cut: 1) the wealthy work harder; 2) they hide less of their income from the government; 3) they bargain harder for higher pay. Long story short, the authors endorse No.3. As they say, “executives can be overpaid if they are entrenched and can use their power to influence compensation committees.”

They’re suggesting politicians should feel emboldened to tackle income inequality and federal deficits by rolling back 30 years of Republican efforts to flatten and depress income taxes. The current 35 percent top marginal income-tax rate is the lowest it’s been since 1992. Before Ronald Reagan’s first term, the rate had not dipped below 70 percent since 1935. As the authors put it:

Up until the 1970s, policymakers and public opinion probably considered - rightly or wrongly - that at the very top of the income ladder, pay increases reflected mostly greed or other socially wasteful activities rather than productive work effort. This is why they were able to set marginal tax rates as high as 80% in the US and the UK. The Reagan/Thatcher revolution has succeeded in making such top tax rate levels unthinkable since then. But after decades of increasing income concentration that has brought about mediocre growth since the 1970s and a Great Recession triggered by financial sector excesses, a rethinking of the Reagan and Thatcher revolutions is perhaps underway. …

With higher income concentration, top earners have more economic resources to influence social beliefs (through think tanks and media) and policies (through lobbying), thereby creating some reverse causality between income inequality, perceptions, and policies. We hope economists can shed light on these beliefs with compelling theoretical and empirical analysis.

That’s a dry way of saying the rich make a lot more than they deserve and they’ve used that wealth to persuade the rest of us that they deserve it.

(Photographer: Mark Horn/Gallerystock)

Reader Comments

Frank Gimsdale

December 9, 2011 8:19 AM

As a former Tax Planner/CPA at a Big 8 I have to laugh at the ignorance of economists when it comes to taxation. Just becuase the rate is high means absolutely nothing if the tax code allows loopholes to avoid paying it. The tax code pre-Reagan TRA86 was my friend as a CPA as it was not impossible to get our client's effective rate into the sub-20% area while at the same time making our services indispensable. The fallacy of the economists is that very few people paid at those top rates--at least none of our clients did. The reality is however, that today's tax code with no high multiple sheltering schemes combined with a 83% tax rate would place us into uncharted water. My first impression is that what happened with the luxury tax where middle class people lost their very high paying jobs building luxury items would representative of the net result.

I got one question though, why on earth would anyone listen to people from a profession that is culpable recommending and supporting the polices that got us here in the first place. Modern economists in my view have no more clue about the economy and what such a tax would do, then the astrologist down the road. Years from now when future generations look back on this time, they will see our economists in the same light that scientists see alchemists today.

david russell

December 9, 2011 8:21 AM

GDP = C + S + G + net exports. So when the gov't takes money from say a wealthy saver and spends it, result: zilch. Now of course, when a gov't spends money it doesn't have (and what gov't doesn't?), well that creates GDP out of thin air.

This study related GDP growth to taxation, but there's more to it than that.

Maximus just Marvelous

December 9, 2011 8:24 AM

JUST LOVE these silly and dreamy "studies." It's not about taxing more. Never has been. It's about spending substantially less through nearly useless and inefficient big government (such as the worthless "depotmint of itch-cation"...Jimma-boy-Carta, 1979...what a clod).

It's WHY AND HOW AMERICA STARTED, and then became the world's most dynamic and charitable country and economy in history. But then liberals wouldn't know much about that, now would they?....because that implies that they're not in charge of the movement of money...for a nice fee, aka an easy and lazy government life and salary.

Elementary math here guys...and a Master's in (Godless) SOCIAL THOUGHT, of all things. Unbelieveable, and for "normal folk"...insulting and repulsive.

These growth rates have ABSOLUTELY NOTHING to do with CEO taxation. They are a function of various corrosive levels of national debt in relation to GDP, brought on by grossly out of control big SOCIALIST governments.

For liberal losers, taxation is MUCH MORE about government control, social manipulation, and political power, than it is about economic productivity, efficiency, and growth. Favorite liberal talking points over coffee, during those oh-so-very-hard days at the office.

It is AMERICA'S CONSTANT GENERATIONAL FIGHT...to weed out the power-hungry and the lazy in government. Again the very reason we all left Europe in the first place...AND WE'RE NOT GOING BACK, THANKS TO THE SECOND AMENDMENT, IF NECESSARY.

Maximus just Marvelous

mmichaels

December 9, 2011 8:33 AM

They do more than use their money to convince the rest of us that they deserve it. They corrupt and distort legislation in ways that pollute the environment, cause wars, destroy the GOP as a political party, prohibit renewal of infrastructure, and if left unchecked, they will undermine our national security through diminishing our economic might by debt they create. They can blame the poor and middle class for debt, but the truth is, they raid the US treasury in opaque and exotic ways that social security, government pensions and medicare can't even come close to.

Rob

December 9, 2011 9:30 AM

I'd assume they'd move if the top tax rate were that high.

Richard

December 9, 2011 9:41 AM

Really? 83%!!! Commies...

It seems that such a tax rate would only drive executive incomes higher as they endeavor to maintain their standard of living while being raped by the government. Besides, how do we really know how much money someone deserves to make? Ridiculous.

DanTe

December 9, 2011 9:55 AM

Sure. Tax away anyone's incentive to come up with the next big thing. Why work harder if it all gets taken away anyway? This is perfect utopia. Just look at the old U.S.S.R., the current India and Cuba to see such paradise. In fact you folks should move to there soonest so that you may enjoy the benefits of your ideals so much sooner.

clarence swinney

December 9, 2011 10:39 AM

10% own 70% net wealth
10% own 70% financial wealth
10% get almost 50% individual income

That is why we rank 5th on Inequality in oecd nations.
That is why we rank 3rd in Least Taxed in oecd nations
Happiness in a people is in direct proportion to Equality.
Us is unhappy

Wm McLellan

December 9, 2011 10:40 AM

People who are paid (or who pay themselves) create have to create more value in their jobs than they consume in pay. The value they create goes to the enterprise stockholders. Consider Steve Jobs. His hard work created value in the products themselves (benefitting customers), plus Apple stockholders, plus AT&T stockholders, plus creators of APPS, plus the governments who collected on taxes. Farmers create value from their hard work plus sun light plus seed and fertilizer. Jobs are created when farmers exchange the value they create through the medium of money. Understand how wealth and jobs are created, then you can escape class envy.

MellowDog

December 9, 2011 10:58 AM

I'd have at least a little more respect for the author and "researchers" if they tried a little less hard to point fingers and supported just facts. Keep in mind, the US and UK DID grow more according to the writing, though you can plainly read that is not emphasized. Stop making the wealthy feel like they cheat, most do NOT. Leave me and other poor folk something to strive for besides winning the lotto.

Steve Walker

December 9, 2011 11:25 AM

I have to say that I think these folks probably have it right, to a large extent.

I'm not so sure about the 85% tax rate part, but I am sure the last sentence;

"That’s a dry way of saying the rich make a lot more than they deserve and they’ve used that wealth to persuade the rest of us that they deserve it."

is pretty much accurate.

John W.

December 9, 2011 11:57 AM

...and that STILL won't be enough to balance the budget or at least take a crack at the debt and rising medicare costs.

MarkD

December 9, 2011 12:27 PM

People keep trying to move the conversation away from taxation relative to government spending and budget (e.g. is the government doing more than it should, incurring more debt than it should, is that sustainable, etc).

Instead we are talking about taxation for redistribution and fairness purposes. One of the problems is that, sure, we could tax the hell out of the super rich (even take ALL their money), but the politicians will spend all that, and come back to the trough for more. Who do you go after then, the top 5%, 10%, or 25%?

The other problem is when the gov't gets in the business of deciding fairness, it enables decisions beyond just money - does that person deserve that much food, education, house, or free time? It is a dangerous road (a road to serfdom, if you will)

ralph Petrillo

December 9, 2011 12:32 PM

THe following would give the treasury a surplus in one year.

1- Change the corporate tax from a tax on net income to a 7% tax on Gross Revenue. A company like Exxon Mobil that earns $ 500 billion would pay $ 35 billion, no deductions . Last year they paid $ 16 billion or roughly 3% of Gross Revenue. GE that had over $ 200 billion in Revenue paid no income taxes for they had so many losses. With 7% they would of paid $ 14 billion. Treasury would have a surplus with this simple change.

2- Progressive flat income tax:

1- Incomes under $ 25,000 - pay no tax
2- Incomes from $ 25,000 to $ 100,000 - pay 12%
3- Incomes from $ 100,000 to $ 250,000 - pay 18%
4- Incomes above $ 250,000 - pay 24%

No deductions

3- Stock options pay 25%.

4- All existing trusts, estates foundations, non proifts that have never paid taxes pay a one time tax of 25%. So Harvard with $ 40 billion would pay $ 10 billion. Everyone pays to reduce the deficit.

With these simple changes US has a surplus and will pay off its debt.

GJC

December 9, 2011 1:26 PM

So what makes anyone think that any side of government (Dems or Republicns) will spend wisely and direct the even greater amount of revenue collected effectively to the areas that need it???

Why do people continue to think that the government knows best??

Hasn't it already been proven that it is dysfunctional and not worth investing in??

tax guy

December 9, 2011 1:50 PM

a little high should be around 75%
these 25 million voters are going to pay their "fair share" for the Iraq war.
not get a bush tax braek and pass the cost of the war on to the middle class...which is what occured.
This is waht happens when you have a gop policy to get more oil on the world market.In the last 10 yrs china has bought up all the rare earth mines around the world and now controls rare earth minerals required for hybrids,
windmills,batteries etc...we will document the cost of the gop bush decision as it will effect the next 40 yrs according to the latest exxon report.

Trajan Rex

December 9, 2011 2:01 PM

Tax at those levels and the rich will leave or stop producing. Either way America loses. Will those morons preaching the virtues of "group greed" never learn.

Svetoslav Elenkov

December 9, 2011 2:03 PM

The irony is that it's the author's views that are being propelled by the media. Not many in the media talk about Austrian economics.

Taking away the actual effect that high taxes would have on the economy - Wasn't the reason the colonies were created taxation from the Brits?

I'm no history buff, but would we have to break out of the US as people to avoid taxation once again?

p.s. I'm not an American born, but I'm here for opportunity. It seems I'll have to move countries again soon.

KCH

December 9, 2011 2:18 PM

83% sounds ridiculous. 38%, which I believe is what you get when you allow the Bush tax cuts to expire on the top 2% doesn't sound bad at all. That's what needs to happen, along with the Simpson-Bowles prescription of cuts to entitlements. Not sure why we're letting Norquist get in the way of fiscal responsibility and progress.

Geoff

December 9, 2011 2:29 PM

God only wants 10% (based on the traditional view--and a flat tax at that). A false idol apparently requires much, much more.

"I'd assume they'd move if the top tax rate were that high."

This comment is more correct than can be possibly imagined.

Dave Fogel

December 9, 2011 2:40 PM

Lets all agree on some major points: no one likes inequality, by gosh its un-american; everyone would like to be rich (please no lying here); the garbage has to be picked up, the mail delivered and the kids have got to go to school; pointing fingers is pretty useless.

Nice to see a lot of ideas but I think the above captures it.

Blank slate, a flat tax of 20% on net income, period,with certain areas carved out for tax shields: like depreciation on capex and amort on intellectual property; municipal taxes paid; charitable contributions and home interest plus other strategic areas in the interest of the US (we can decide this after resetting rates). All operating losses in the past to be amortized over next 5-7 years. Maybe it needs to be 21% or 22% or 17%, whatever we need to break even.

One last thought, the reason medical and college costs have gone through the roof is that there is no market discipline on costs, the government subsidizes and sponsors it. I'm not against college loans but if it is so easy to borrow the money for school there can be no pushback on prices, same idea for medical costs. Think about it. I dont have good solutions yet, working on it, one major crisis at a time.

JR

December 9, 2011 2:48 PM

Trickle down economics does not work. The money left with the top, stays with the top.

As top rates for taxes have declined in the past years, all that's happened is income and wealth inequality has increased.

The middle class just keeps getting saddled with more debt (both privately and publicly).

The super rich won't all leave if taxes are high. If they do, then they are just greedy crooks and I think we'd be better off without them. There will always be reasonable people to take their place.

I don't think most people start doing stuff with the dreams of becoming mega-rich. If someone gives up because they think "Wah, I might only make $1 billion instead of $10 billion, wah!" then they are sick people.

nati

December 9, 2011 3:18 PM

how about tax them 100%, and drive them out of country. then there's only middle class or poor left, and after a while, only the poor left in US.

stupid idea.

Ed

December 9, 2011 3:21 PM

What a silly study, tax the rich 83%.
What would you do with all that money, give more "social services" to a growing population of do nothings, who do not contribute themselves?
A population ever dependent on a Government check, that depends on a few overachievers to fund, is a fast way to ruin.

Carlton Twain

December 9, 2011 3:22 PM

Pointing out that the top tax rate COULD be raised to 83% without substantially reducing GDP is not the same as saying that it SHOULD be. But in my view, a balanced way of increasing national output in a way that would shift most of the benefits to lower and middle income people would be (1) to raise the top tax bracket to perhaps 50%, (2) to reduce or eliminate corporate and Social Security taxes, and (3) to reduce or eliminate minimum wage laws and the monopoly power of unions. In other words, reinstate market wages, but let the people who benefit the most from free markets pay for the bulk of government services.

BB

December 9, 2011 3:26 PM

The authors' graph actually disproves their thesis. A best fit line through the data (Ignoring Ireland, since it's clearly an outlier) shows that the countries with the lowest tax rates, on average, enjoy about 0.5% higher GDP than the countries with the highest rates. This a large difference...The lower-taxed countrie's GDP is roughly 25% higher than the high-tax countries (2.5% vs 2%).

Ed B

December 9, 2011 3:56 PM

I think most of you are missing the point. Lower tax rates at the top did not inspire more productivity or greater GDP growth than in countries where no reductions were made. CEOs & Bankers etc. were no less productive in the 60s or 70s than they are today. Yet, their relative pay is more than 10 days what it was in those days. Many think that higher pay equals higher productivity, but that has not been the case. (particularly when looking at one individual) It has resulted in higher risk taking because the potential pay offs into their own pockets are higher. It has also resulted in the greater concentration of wealth at power at the top to the point that many of you have been convinced that millions more in their pockets is good for you. A higher top marginal rate would cool this fever a bit and hopefully encourage shareholders & boards to more diligently examine the real value they are getting out of their CEOs.

Ed B

December 9, 2011 3:59 PM

Wm - regarding Steve Jobs. I am pretty sure that the amount of money that Jobs made had very little to do with how productive or creative he was. The question is if higher taxes at the top will really reduce productivity. If Jobs had paid 10% more of his income in taxes, I think there would have been no difference in what he and Apple have done.

Ed B

December 9, 2011 4:02 PM

BB - you are misreading the chart. That is the change in rates, not the actual rate. Unless the US rate is -35%...
Also, I don't think a "best fit" line here is really appropriate. The conclusion it shows to me is "no correlation".

ChrisBern

December 9, 2011 4:17 PM

Uhh, you do realize that those people earned their money, right? If it's not legal for one citizen to steal from another, then why is it right for the government to take money from one person and give it to another? It's merely theft by a different name.

And by the way you could confiscate ALL of the net worth of the Forbes top-400, and it would barely let us balance the budget for 2012. Then what are we going to do for 2013? This idea that we can just soak the rich and all of our problems will go away is ignoring the math of how pervasive our deficits are.

Overworked, underpaid, self-employed

December 9, 2011 4:19 PM

"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not"
Jefferson

If America is the land of opportunity, what incentive remains to achieve once you take away opportunity?

All this talk of taxes, perhaps evaluating
goverment spending might be worth a look?

Michael Higginbottom

December 9, 2011 5:05 PM

"But after decades of increasing income concentration that has brought about mediocre growth since the 1970s" These "economist" seem to forget that the 1970s were all about Stagflation, paying for the Vietnam War, and nose dive from the "malaise" of the Carter Administration. Where in the constitution does it say take all from the producers, and pay to keep politicians in office? This sounds like Stalin era Communist economics. It is always easy to bash the top 1%, but people who create the jobs? Why hate, congratulate!

Sunshine Connie

December 9, 2011 5:16 PM

When everyone pays something into the Federal Income Tax system I will value their input. Right now far too many able bodied choose to ride in the wagon and have no desire to work at helping pull it. When able bodied refuse to take work shame on them. I for one find the yoke of their lack of effort not only onerous but contemptable.

It pleases me to help others and charity is a very good thing. Entitlements encourage sloth which is profoundly bad and demoralizing.

Ed B

December 9, 2011 5:18 PM

Overworked - The question is who are we talking about having or not having opportunity? The trend for the past 30 years has been that the top 10% have taken advantage of great opportunities to accumulate more and more wealth. The bottom 50% have only had the opportunity to see little if any increase in their wages, less job security, higher housing costs, and higher medical costs. Let's focus on giving more opportunity to the bottom 50% to 80%, and we will see this country grow and be a place where all can work their way out of poverty.

Free Person

December 9, 2011 5:19 PM

"God only wants 10% (based on the traditional view--and a flat tax at that). "

But you don't get anything from that 10%.

At least government gives you roads, education, and a few other things.

Ed B

December 9, 2011 5:21 PM

Most detractors seem to be assuming that higher taxes on the rich will equal more "hand-outs" to the poor. With $15 trillion in debt, no one is talking about increasing services for low income people. We have to pay off that debt in some way. It is likely a combination of taxes and spending cuts. This article simply says that there is room to increase the top marginal rate and very likely see little or no impact on our overall GDP and productivity. Please respond to the actual issue presented by this article rather than simply reciting your ideology.

Diablo.Bill

December 9, 2011 6:41 PM

Both side of the aisle need to quit giving away our money, to the people who won't work (unemployment, welfare), to the industries that don't need it (oil), the countries that don't appreciate it (Pakistan) and to their buddies in big business. The current top tax bracket is $371k. Any "small business" with more than 20 employees, or 13 like mine, has principles that will be likely to have an income above that. Sure all of these articles about taxing the top bracket are thinking they would only be taxing the multi-millionaires. And that's where they would be wrong. If my business partner and I had to pay 83% tax on our income, we would HAVE TO lay off 70% of our work force, JUST TO BE ABLE TO PAY OUR TAXES. Exactly how does that sound sustainable?

TheAnarchoCapitalist

December 9, 2011 8:19 PM

Many of the rich are rich because they bothered to learn how things work and what truly pulls the strings. This means, if you take away more from them, they'll only become greedier. They're the street hustlers in Armani suits, and it's all about getting an "edge." Go ahead, tax them all you want. They'll find a way to beat you, and screw you even more.

PAH

December 9, 2011 9:42 PM

First of all, Politicians will always spend all what they have (revenues) plus as much as they can can. All the talk about tax revenues does nothing to address the main problem which is out of control government spending. Tax everyone 100% and the pols will spend it all. Fiscal discipline is badly needed.

Willie B

December 9, 2011 10:28 PM

Set the tax rate at 100% for the rich. Actually take all their money and give it to the poor. Within 10 years the wealth will be right back where they are now. The poor will not know how to invest and keep it, those that were rich will become rich again and those that are poor will be poor again. It is sad but true!

bobcat

December 10, 2011 12:49 AM

The rich do NOT PRODUCE, they exact profits from the productivity of their employees.
They haven't created jobs from their increased profits due to the tax cuts, they've hoarded their windfall for more than a decade.
Taxes on the rich were 90% when Ike was president, and we grew, and grew and grew. WHY do the GOP refuse to acknowledge something that worked?

Captain Obvious

December 10, 2011 3:13 PM

The tax policy in the US is backwards. We should calculate the total government spending needed, then based on the percentage of the individual income revenue as a percentage of the GDP and send their portion of the bills to the idividual. And everyone just pay their share. This way, there will never be any budget deficit. Samething with the national debt. Everyone gets a bill to paid as a percentage of their earning to GDP ratio.

TOM SAWYER

December 11, 2011 5:14 AM

Someone posted that when when govt taxes the rich and spends it they get zilch. WHY! The rich make profits and often save it or spend it on one item for themselves. How does that help the vast majority ? That is what is wrong today. In the old days if a business wanted to save on taxes he invested in the business. Today he knows he is not going to get taxed on profits so he pockets the money.

fritz

December 11, 2011 6:50 AM

A lot of people here seem convinced that the wealthy work harder. OK, fine. Let's pay everyone according to calories expended. That should assure that the hardest workers are rewarded for their efforts, and everyone has an incentive to work hard. Right?

No? Hmmm...perhaps we should pay everyone for their productivity? Machines vastly improve productivity, so CEO's of the most automated factories should get most of the wealth. They deserve it, for automating...um, I mean, creating...all of those new jobs.

Right?

Oh, screw it, let's just go back to barter.

Westernfan

December 12, 2011 4:48 PM

The decades old justification for lowering taxes was the assumption that the beneficiaries of lower marginal rates would invest in plants and equipement and, yes, create jobs. Those investments then created more jobs, and therefore more taxable revenue, and that funded the government while stimulating the economy. While that premise may have been valid once upon a time, that time has obviously passed.

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About

"The Wealth Debate" is a running discussion of wealth, poverty, the economy and income inequality in the U.S. and the world. It was started shortly after the Occupy Wall Street movement sparked a global protest about the fallout from the financial crisis and money in politics. You can reach the editors, Dan Beucke and Mark Gimein, by email, or follow BloombergNow on Twitter to keep up with posts.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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