Two researchers using the Laffer Curve have just calculated a tax rate on the rich that would maximize revenue to the government. If you assume a broad base and no deductions, they peg the revenue maximizing-rate for top earners at 76%. That's for federal income tax only. (In reality, the very top earners today only pay 15% on capital gains.)
The Laffer Curve shows that if both a 0% rate and 100% rate of taxation generate no revenue, it follows from the extreme value theorem
that there must exist at least one rate in between where tax revenue would be a maximum. The
Laffer Curve is typically represented as a graph which starts at 0% tax, zero revenue, rises to a maximum rate of revenue raised at an intermediate rate of taxation and
then falls again to zero revenue at a 100% tax rate.
Economist Paul Pecorino presented a model in 1995 that predicted the peak of the Laffer Curve occurred at tax rates around 65%.
A 1996 study by Dr. Y. Hsing of the United States economy between 1959 and 1991 placed the revenue-maximizing tax rate (the point at which another marginal tax rate increase would decrease tax revenue) between 33% and 36%.
A 1981 paper published in the Journal of Political Economy presented a model integrating empirical data that indicated that the point of maximum tax revenue in Sweden in the 1970s would have been 70%.
A recent paper by Trabandt and Uhlig of the National Bureau of Economic Research presented a model that predicted that the U.S. and most European economies are on the left of the Laffer Curve (in other words, that raising taxes would raise further revenue).
The New Palgrave Dictionary of Economics reports that for academic studies, the mid-range for the revenue maximizing rate is around
A study by Teather and Young of the conservative Adam Smith Institute has suggested that the optimal rate for capital gains tax, as opposed to income tax, may be around 20% (today it's only 15%), but this is at least partly due to savvy taxpayers holding onto assets in anticipation of tax rates being lowered in the future.
A 2007 study by the conservative think tank, the American Enterprise Institute, found that the revenue maximizing rate for corporate taxes in OECD countries, such as the U.S. (Organization for Economic Co-operation and Development) was about 26%, down from about 34% in the 1980s. But even if you agreed with this assessment, for the past 25 years corporations have actually only been paying an "effective" tax rate of 14% to 18%).
In 2005, the Congressional Budget Office (CBO) released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates". In the paper's most generous estimated growth scenario, only 28% of the projected lower tax revenue would be recouped over a 10-year period after a 10% across-the-board reduction in all individual income tax rates. The paper points out that these projected shortfalls in revenue would have to be made up by federal borrowing. And what have we been forced to do since the Bush tax cuts?
Supply-side economics is a school of macroeconomic thought that argues that overall economic well-being is maximized by lowering the barriers to producing goods and services (the "Supply Side" of the economy). By lowering such "barriers" ( as in: reasonable environmental and financial regulations, fair taxes, and fair wages), consumers are thought to benefit from a greater supply of goods and services at lower prices. (As in goods made in China like iPods and cheap Chinese-made goods sold at Wal-Mart).
Typical supply-side policy would advocate generally lower income tax and capital gains tax rates (to increase the supply of labor and capital), "smaller government" (as in Social Security, Medicare, and unemployment insurance) and a lower regulatory "burden" on enterprises (to lower costs). Although tax policy is often mentioned in relation to supply-side economics, supply-side economists are concerned with all impediments to the supply of goods and services and not just taxation.
Supply-side advocates have argued for lower taxes on the basis of supply-side benefits while citing the Laffer curve as a reason that such cuts would also raise revenue. However, the objective of supply-side theory is to maximize the supply of goods and services, and to achieve this one should, in theory, always lower taxes. In contrast, the Laffer curve would suggest that a tax cut would raise tax revenues only if current tax rates were in the right-hand region of the curve.
The Laffer curve and supply-side economics inspired Reaganomics ("trickle-down") and the Kemp-Roth Tax Cut of 1981. Supply-side advocates of tax cuts claimed that lower tax rates would generate more tax revenue because the United States government's marginal income tax rates prior to the legislation were on the right-hand side of the curve.
David Stockman, Ronald Reagan's budget director during his first administration and one of the early proponents of supply-side economics, was concerned that the administration did not pay enough attention to cutting government spending. Stockman said that "Laffer wasn't wrong, he just didn't go far enough" (in paying attention to government spending).
Some have criticized elements of Reaganomics on the basis of equity. For example, economist John Kenneth Galbraith believed that the Reagan administration actively used the Laffer Curve "to lower taxes on the affluent." Critics also point out that since the Reagan tax cuts, income has not significantly increased for the rest of the population.
Former Labor Secretary and economist Paul Krugman contended that supply-side adherents did not fully believe that the United States income tax rate was on the "backwards-sloping" side of the curve and yet they still advocated lowering taxes.
Political authorities saw that other national governments fared better by having tax collectors claim a medium share of a rapidly growing economy (a low marginal tax) rather than trying to extract a large share of a stagnant economy (a high average tax). Another explanation might be that a higher tax rate also increases the risk of tax evasion towards tax havens, which leads governments to lose revenue. (But even with the Bush tax cuts, people were still moving money to off-shore accounts. They prefer to pay NO taxes.)
|A new report Peter Diamond and Emmanuel Saez calculated the tax rate on the rich that would maximize revenue to the government as 76%. Paul Krugman summarizes:|
"In the first part of the paper, D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that
maximizes the revenue collected from these top earners—full stop. Why? Because if you're trying to maximize any sort of aggregate
welfare measure, it's clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with
the difference it makes to the welfare of the poor and middle class. So to a first approximation policy should soak the rich for the
maximum amount—not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes.
Now, this doesn't imply a 100% tax rate, because there are going to be behavioral responses—high earners will generate at least somewhat less taxable income in the face of a high tax rate, either by actually working less or by pushing their earnings underground. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%."
Today the highest income bracket's tax rate is only half that, at 35%; but that rate doesn't kick in until one earns a "wage" of $379,000 a year; but even doctors are rarely paid this much (members of congress earn $174,000).
It's usually the CEO's of large banks, major defense contractors, oil barons, hedge-fund mangers, lobbyists, and corporate executives who fall into this higher income range. But the bulk of their earnings are usually not in the form of paid wages.
Those people (the top 1%) earn most of their money with capital gains
earned through stock incentives and bonuses that are only taxed at 15%, not the upper marginal income tax
rate of 35% (Regular working people earning over $35,000 a year pay 25%)
Rather than change the tax rates, just eliminate loopholes for corporations to collect the "full effective rate" of 35%, and tax capital gains as "regular income" and then tax them according to the current income tax bracket. If CEOs earn $5 million in stock options, rather than tax them at 15% for capital gains, tax them at 35% for regular income.
It would be half as less than the proposed 70% rate (as suggested by the new data), and it would also bring in a lot more revenue for the U.S. Treasury.
Because corporations have been paying a low effective corporate tax rate for decades, that didn't keep them from outsourcing jobs overseas for cheap labor, but rather, it did enable them to pay very excessive CEO salaries...who only pay 15% in federal incomes for capital gains.
But Republicans, bankers, the Tea Party, and corporate CEOs are still crying about high taxes!
My Related Posts:
- Subsidies for the Rich and Famous
- Historical Tax Rates on the Rich (1862 to 2011)
- The Second Gilded Age: History Repeats Itself
- Mellon: The Banker Who Rigged the U.S. Tax Code
- The GOP Tax Plan - Ignorance, Insanity, or Greed?
- We have a Revenue Problem, Not A Spending Problem
- 280 Corporations are "Too Big to Tax"
- Trickle-Down Economics: The Cruel 30-Year Hoax
- You Pay Hidden Entitlements for the Rich
- Record Profits + Record Bonuses = Zero Jobs
- Mom Pays More Taxes Than Bankers!
- It's not Class Warfare - it's just "Business"
Other Related Articles:
- "The richest 1 percent have more financial wealth than the bottom 95 percent combined."
- The total net worth on the Forbes 400 List marks $1.5 Trillion in 2011
- The Global Super-Rich Stash: Now $25 Trillion
- Historical Tax Rates and Time-line
- Capital gains from Citizens for Tax Justice
- 1977 - 2007 tax rates from U.S. Treasury
- Economic Policy Institute on capital gains taxes
- Capital gains explained from U.S. Internal Revenue Service
- The great corporate tax scam
- The top 1% took home 23.5 percent of income in 2007, the largest share since 1928