* Based on studies by Emmanuel Saez, Thomas Piketty and Stefanie Stantcheva; and excerpted from an updated version of an article originally published by VoxEU.)
In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled, from less than 10% in the 1970s to over 20% today. At the same time, top income tax rates on upper income earners have declined significantly since the 1970s.
Doubling the average US individual income tax rate on the top 1% income earners from the current 22.5%-23.8% level to 45% would increase tax revenue by 2.7% of GDP per year.
The United States experienced a 35 percentage-point reduction in its top income tax rate and a very large ten percentage-point increase in its top 1% pre-tax income share...[but] higher top tax rates can increase tax avoidance. In that scenario, increasing top rates in a tax system riddled with loopholes and tax avoidance opportunities is not productive. A better policy would be to first close loopholes so as to eliminate most tax avoidance opportunities, and only then increase top tax rates.
Data show that there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s. Countries that made large cuts in top tax rates, such as the United States, have not grown significantly faster than countries that did not. Rich countries have all grown at roughly the same rate over the past 30 years – in spite of huge variations in tax policies.
Until the 1970s, policy-makers and public opinion probably considered that at the very top of the income ladder, pay increases reflected mostly greed rather than productive work effort. This is why governments were able to set marginal tax rates as high as 80% in the US. The Reagan/Thatcher revolution has succeeded in making such top tax rate levels "unthinkable" since then.
Now, however, we have seen decades of increasing income concentration that have brought about mediocre growth since the 1970s. And with the Great Recession that was triggered by financial sector excesses, a rethink of the Reagan and Thatcher revolutions is underway.
The top 1% has gained at the expense of the 99% – a view endorsed by our findings about the highly unequal distribution of income gains during the recovery. With higher income concentration, top earners have more economic resources to influence both social beliefs (through think tanks and media) and policies (through lobbying), thereby creating some "reverse causality" between income inequality, perceptions, and policies.
The job of economists [and the media, and the politicians] should be to make a top rate tax level of 80% at least "thinkable" again.
* Read: Tax on the Rich: 91% is too High, but 23.8% is too Low --- Tax everything over $1 million a year at 45% ---- that's PERFECT!!!!!!!!!!!!!!!!!!!!!!!!!!!