What Would Piketty’s 80 Percent Tax Rate Do to the U.S. Economy?

By Michael Schuyler of the Tax Foundation. Excerpt:

"In his best seller, Capital in the Twenty-First Century, Thomas Piketty calls for much higher taxes on upper-income individuals. He recommends a global wealth tax and, for the United States, top income tax rates of 80 percent on income above $5 or $10 million to combat inequality and 50 or 60 percent on income above about $200,000 to combat inequality and grow the government.

We used the Tax Foundation’s Taxes and Growth (TAG) model to estimate the economic and revenue effects if Professor Piketty’s suggested income tax rates became law.

Key Findings

• If ordinary income were taxed at the top rates of 80 and 55 percent, our model estimates that after the economy adjusts, total output (GDP) would be 3.5 percent lower, wage rates would drop 1.6 percent, the capital stock would be 7.4 percent less, and there would be 2.1 million fewer jobs.
• If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse. GDP would plunge 18.1 percent (a loss of $3 trillion dollars annually in terms of today’s GDP), the capital stock would be 42.3 percent smaller than otherwise, wages would be 14.6 percent lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.
• Although Piketty’s proposed income tax increase may appear to target only upper-income taxpayers, all income groups would suffer from the economic fallout.
• Our model estimates that the after-tax incomes of the poor and middle class would drop about 3 percent if the higher rates do not apply to capital gains and dividends and about 17 percent if they do."