More on Taxes at the Top

January 21, 2008

In a post last week — “Taxes at the Top” — I suggested that higher tax rates on the richest Americans very likely would increase government revenues. Austan Goolsbee has a closely related discussion in Sunday’s New York Times (here; comment by Mark Thoma here).

Goolsbee addresses the “supply-side” argument that lower tax rates on top earners will produce a rise in their earnings and pretax incomes, due to greater investment or work effort. That might increase tax revenues. Goolsbee argues, and shows, that the evidence doesn’t support this claim. He focuses on the effect, or lack thereof, of changes in the top marginal tax rate:

“My calculations show that in the four years after top marginal rates were cut in 1981 and 1986, and in the three years after the rate cut of 2003, average real salaries (subtracting inflation) for the top 1 percent of earners grew 18.8 percent, 22.5 percent, and 17.4 percent…. A supply-sider might see this as evidence of the growth power of cutting top rates. But the data also show that incomes at the top have been growing rapidly regardless of what happened to tax rates. In the four years after the increase in top marginal rates in 1993, average salaries grew 18.7 percent among the top 1 percent of earners…. Seeing the same pattern when taxes rose as when they fell indicates that tax cuts weren’t responsible.”

The effective tax rate on the top households is more meaningful than the marginal rate. The chart below shows trends in the effective rate and in the pretax income of the top 1% of households. The data are from the Congressional Budget Office (here).

Goolsbee’s conclusion holds. The effective tax rate on the top 1% was reduced from 37% to 28% between 1979 and 1982. In the ensuing five years the average pretax income of the top 1% jumped sharply. But between 1990 and 1994 the effective rate on the richest was raised from 29% to 36%, and in subsequent years pretax incomes at the top rose even more dramatically.

One Response to “More on Taxes at the Top”

  1. justenough Says:

    I believe that corporate tax rates also fell in this period, so there was a lot more money available to reward corporate top dogs /////this plus the decline of marginal inome tax rates on their salaries meant that corporations could give huge incentives in cash etc, rather than sheltered options and so on. not that they lacked for those either. So, even as tax revenue to the gov rose slightly from collecting on the earned income of these lucky ducks, overall revenue from corporate taxes fell like a rock. So, overall tax hit on corporations fell. But, let’s look at where we are now, was that a good thing?
    Bloomberg has been trying to draw our attention to the fact that our lack of revenue, from wherever it is we decide to get it, has impoverished the country! We have underfunded infrastructure; health care; education; energy source development; the stupid country looks like Brazil now! Have fun eating cake while the starving give you TB on the subway is what the political parties should campaign on. Can’t tell a dem from a republican, and all of them have sold us down the river.


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