Could a Top *Marginal* Tax Rate of Over 80% Be Efficient?

It is somewhat counter-intuitive, but a lot of good economics has that property.

The top 1% of US earners now command a far higher share of the country’s income than they did 40 years ago. This column looks at 18 OECD countries and disputes the claim that low taxes on the rich raise productivity and economic growth. It says the optimal top tax rate could be over 80% and no one but the mega rich would lose out.

Piketty, Saez and Stantcheva: Taxing the 1% – Why the Top Tax Rate Could be Over 80% — guest posting at Naked Capitalism.

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2 Responses to Could a Top *Marginal* Tax Rate of Over 80% Be Efficient?

  1. belliott says:

    Isn’t the question whether tax rates should even aspire to be efficient? As soon as you do, you wind up picking winners and losers in an ever complex social engineering versus special interest battle. Occupy the tax code.

  2. Kaleberg says:

    Anyone who tries to use a “pricing” based optimization algorithm runs into this. I remember one classic paper (from Xerox in the 80s) which tried to efficiently heat or cool an office building by giving each room or space a certain level of resources and then having a market for heating or cooling. They managed to get it to work, but there was always one room or space that managed to accumulate all the pricing credits and bring the system to a standstill, that is, most of the other rooms and spaces could not afford to heat or cool themselves properly. The solution was tossed out casually, they just confiscated ALL the credits on a regular basis and reissued them. That led to a fairly efficient algorithm.

    If you want efficiently, you have to eliminate accrued wealth. You can allow a certain buffer to smooth system operations, but at a certain point, the accumulation starts reducing the efficient allocation of resources. I’m not going to argue for a complete reallocation of wealth on a regular basis as they do with those jubilees in the Old Testament, but even then, it was easy to spot economic inefficiency.

    Yes, an 80% tax rate can be efficient. Empirical studies show that our economy does best in terms of growth with about a 2/3 top marginal rate, but 80% has been shown to be more efficient than the lower tax rates adopted over the last 30 years of slow growth.

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