Tuesday, October 7, 2014

Can the US raise much revenue by raising taxes on the 1%?

From James Pethokoukis of AEI.

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Image Credit: Wikipedia

Image Credit: Wikipedia

Not really, according to a new analysis by Nezih Guner, Martin Lopez-Daneri, and Gustavo Ventura in VoxEU. Using a model that mimics the tax distribution characteristics of the US economy, the researchers find a revenue-maximizing federal rate of 37% for the top 5% and 43% for the top 1%. The current top marginal tax rate is 39.6% (but is effectively closer to 45%).
From the study:
The message from these findings is clear. There is not much available revenue from revenue-maximising shifts in the burden of taxation towards high earners – despite the substantial changes in tax rates across income levels – and that these changes have non-trivial implications for economic aggregates.
1.) Left-of-center economists such as Peter Diamond and Emanuel Saez have been arguing that top rates of 50% to 70% or higher would raise plenty of tax revenue without damaging the economy. Inequality researcher Thomas Piketty has called for top rates of 80% on income and wealth. The Guner/Lopez-Daneri/Ventura study suggests those rates are too high and would cause great economic harm. (Of course, some want high tax rates for punitive reasons, not redistributive or budget-balancing ones.)

2.) This study also seems to support the finding’s of the UK’s Independent Fiscal Oversight Commission, which determined that cutting that nation’s top rate from 50% to 45% was revenue neutral, implying the revenue maximizing rate is in that range.

3.) Keep in mind these Laffer Curve effects are all about short-term economic impacts. But economists agree that long-term effects are important, too. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. As Aparna Mathur, Sita Slavov, and Michael Strain argue in a 2012 analysis:
“Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate.” Again, Guner, Lopez-Daneri, and Ventura:
To conclude, it is important to reflect on the absence of features in our model that would make our conclusions even stronger. First, we have abstracted away from human capital decisions that would be negatively affected by increasing progressivity. Since investments in individual skills are not invariant to changes in tax progressivity, larger effects on output and effective labour supply – relative to a case with exogenous skills – are to be expected. Second, we have not modelled individual entrepreneurship decisions and their interplay with the tax system.
4.) At the same time, this study is the latest in modern tax research to suggest that cutting top tax rates to historically low levels — certainly below 30% — would be a huge revenue loser.

5.) If the left wants to deal with rising government spending from entitlements (or to pay for new programs) through higher taxes rather than deep structural reform, they are going to have to support a value-added tax on the 99%.""

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