How high should the top tax rate be?

Some economists say Americans making $3 million or more can handle a levy of up to 66% with no harm.

By Jason Notte Apr 15, 2013 7:23AM
Wealthy couple celebrating in a car ( Image Source/Getty Images)Remember that shift in the top income tax rate from 35% to 39.6% that followed the fiscal cliff debates? It's nowhere near what the top earners in the U.S. can afford to help keep the nation's finances afloat.


Andrew Fieldhouse at The Fiscal Times put the nation's upper economic echelons on notice last week by letting them know they're not paying anything close to what economists feel is their fair share.


Amid stifled economic output, stagnant job growth, sequestration cuts, the expired payroll tax cuts, the stonewalling of the American Jobs Act and the gradual replacement of stimulus with European-style austerity, Fieldhouse says a dollar of government spending cuts will do four to seven times as much economic damage than an additional dollar of revenue collected from upper-income taxpayers.

Economists Peter Diamond and Emmanuel Saez estimate that a combined federal, state and local tax rate of 73% for the top tier would maximize revenue while minimizing damage to the rest of the economy. In a recently released paper, Fieldhouse says this implies that lawmakers could feasibly raise the federal income tax rate from 39.6% to roughly 66% before maxing out.


Unfortunately, this doesn't exactly work when the top threshold starts at $450,000. Fieldhouse points out that the top income tax rate of 91% from the 1950s, consistently referenced by tax advocates, worked only because it directly attacked skewed market distribution of income. In the 1950s, the threshold for that 91% tax rate was the equivalent of $3 million in 2012 dollars.

But why ratchet up the taxes on those making $3 million or more? Fieldhouse argues that the decline in that top tax rate over the last half century or so has had a statistically insignificant effect on economic growth. At the same time, it has had a profound effect on the concentration of wealth and imbalance in income in the U.S. during that time.


Although he acknowledges that "political realities stand in the way of optimal policy," he insists that such a hike would be the best way of hammering at the deficit while letting the greater economy heal.


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182Comments
Apr 15, 2013 9:17AM
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So the harder you work the more you lose? That certainly make sense!  Playing that game again of taking from those who became successful!  I thought this was America were the idea of a success story is encouraged, not punished.  Note sure when America made the change from a capitalist society to a socialist.  Why do the successful have to make of for those who want hand outs?  It's not a right in this country for your government to give handouts, but that's exactly has begun.  Why would people want to work when they can sit home and collect free money for doing nothing?  Why is that ever addressed?  Think about how much that would help the economy if they contributed, instead of taking from the people who work to make this work and giving their money to give to them!
Apr 15, 2013 9:40AM
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Once you finish taxing the very wealthy, you'll need to tax the wealthy, then the rich, then the middle class, then what?  Then of course, what will this do for job creation?  Not that the president has done anything to increase productivity in the US.  This is just the socialist left trying to fund their new government.  Liberals....sheesh!
Apr 15, 2013 9:29AM
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How about a fair flat tax rate, you despicable criminals. At what point does the confiscation, plunder and theft of individual prosperity and personal property by the government stop? End the Fed, abolish the 16th Amendment, restore sound money, get rid of the Banksters.

“When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.” – Frédéric Bastiat,"The Law"1850



Apr 15, 2013 9:24AM
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This is garbage reporting and nothing more than a smoke screen story to cover-up Obamas failure as a President. No jobs, more spending, and more taxes. This idiot has done nothing to benifit the country other than making jimmie Carter look good.... Even Bill Clinton, the pervert that he is, reached across and did  good for the country. This Idiot, has done nothing more than divide the country, with Gay, Gun control, and Immigration stories he keeps pushing (and Birth Control) to hide his lack of Jobs, failed economy, failed foriegn, policy, failed healthcare, and on and on... Not to mention, look around... The only organization to benifit , Across the board, are Unions, and they are the downfall of this country. They used to benifit, now they are Organized Crime, in America and out of control!  Wake up America, while we still have a country to wake up in!
Apr 15, 2013 9:29AM
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More Keansian Socialist dribble from MSLSD.  No one paid the 91% tax rate in the 50's as there existed sufficient deductions and loopholes to reduce effective tax rates for the ultra wealthy.  Every place this draconian tax policy has been tried it has failed.  Tax revenues actually fall.  The ultra rich simply move their wealth offshore where the unintended consequence is less job growth here.  One simply has to look at France, Venesuela or Kalifornia today to see how well these theories work.  Even Russia figured this out and reduced their maximum personal tax rate to 13% since 2006 compared to 39.6% in the  land of the "free".  Well, free for some anyway..
Apr 15, 2013 9:35AM
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That's right, it's all about money.  Always has been, always will be.  It's not about paying your fair share, health care, immigration, guns, etc...

It's all bs to get more of your money!

Apr 15, 2013 10:17AM
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Boring, boring, boring. How many times in the past 2 years have real financial experts pointed out that even a 90% tax with NO loopholes / exemptions would  pay the government's bills for less than  30 days. It is spending, you turkeys, that got us in this chasm. Instead of doing your wonderful hypothetical regression analyses why don't you tell the sheeple just what the interest will be on our national debt in 2024 if interest rates are back up to just 5.5% ? 
Apr 15, 2013 10:18AM
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I'm all for making sure the rich pay their fair share of taxes, but no - this is too much. How is it fair for anyone to lose 73% of their income to federal & state taxes?

 

To some extent we should all be striving to be taxed at the top rate - to be as successful as possible in our chosen profession. Once you get to 73% taxes or 91% from the 50s what's the point in working any harder? I don't care if there are/were loopholes either - why encourage people to skirt the system? What's the point?

 

Too much of anything is a bad idea.

Apr 15, 2013 10:51AM
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 Why not just cut all government workers payroll by 66% - problem solved.
Apr 15, 2013 11:05AM
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It never ends.   It just never ends.
Apr 15, 2013 10:40AM
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I agree with these economist that the deficit is a problem. That is where the agreement ends. We would be wise to remember this is a global economy, if were to raise the tax rate to 66% on high wage earners they may out migrate. Future high wage earners may never immigrate. Furthermore, it would deincentivise productivity. As we progress as a modern economy, we would be wise to remember that the wealth gap and wealth are largely natural and behavioral. If we woke up tomorrow with no wage or wealth gap, the first order of business would be be to allow market forces and human behavior to create the gaps, to reward thrift, productivity and enterprise while discouraging sloth.
Apr 15, 2013 11:01AM
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For such intelligent men (both economist are professors with UC Berkley roots and one is French, which may explain the love of taxes) this is a very limited, low brow method for reducing a government debt. First inflation (the more something cost, the more tax you pay on it) will be the largest unavoidable tax for all soon enough, off-shoring of wealth can’t protect against inflation. Second the best thing the government could do to get the economy rolling is reduce the number of effective monopolies and duopolies in our economy. Create more competition, which leads to more hiring, more innovation and a larger tax base. Competition, it’s where we start.

Apr 15, 2013 12:43PM
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It seems preposterous to advocate taxes on the rich and poor (last weeks tirade) and cut services for the elderly (death counseling only for medicaid) when many corporations pay little or no tax.  The tax code that allows delaying taxation of offshore funds and grants credits in excess of tax liability (such as GE's negative tax for importing wind turbines from China) hurts the country far worse than the tax that could be gained in the upper 1%.  The congressmen that write these items into the tax code are hurting the average citizen as well as the country.  In fact, taxing the rich is not a good idea at all as Romney disclosed that they use the loopholes to pay a much lower percentage of taxes that the average middle class citizen.  The fact is that while Microsoft advocates all these forms of taxation, they also hold billions in untaxed offshore accounts.
Apr 15, 2013 10:33AM
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the system can obviously be improved. however, stupid political banter will not get it done. focusing solely on people who make 5 million dollars and more will not accomplish much. certain reforms may need to be put in place for that group, but that cannot totally solve the problem. targeting sounds good, but is not effective policy. dividends were taxed at ordinary rates for many years. then the rate was lowered to 15% and then increased to 20%. it would not be that hard to tax the first 25,000 at the lower rate and then tax the balance at a higher rate. this would incent people to invest, but would not necessarily reward people who have substantial capital. historically, interest was taxed at a higher rate than dividends. that was, in part, because of the higher level of risk in an equity than a bond or cd. for me that is still logical. we can cap interest on a home, although inflation has made the million dollar cap appear almost logical. for those who want a flat tax or a vat, be careful of what you wish for. we should be determining the level of government spending we can live with and the build a tax system that can meet that.
Apr 15, 2013 1:09PM
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"Tax the Rich, Feed the Poor, 'Til There are  no Rich no More"..that's crazy; no one should be taxed that much.., don't forget us blue collars work for the rich. Most everyone would agree to a flat tax of say 20% with no deductions; that should give more tax dollars for the Government to operate, and mismanage; oh, and then you could dissolve the IRS, another huge tax savings and a win-win
Apr 15, 2013 1:09PM
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Can someone explain how giving tons of money away to foreign governments, funding companies that go bankrupt within a year, handing out grants to every foolish "study" people can think of, and having little to no regulation on welfare helps the economy?
Apr 15, 2013 2:05PM
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I went back through more of the comments, and I kept seeing the phrase "fair share".  Why is it that so many want to soak the rich under the guise of "fair share"?  Too many don't pay any income tax at all, and actually get a refund after paying NO tax (see EIC).  These people don't mind TAKING even MORE than their "fair share" -- they get education (provided by the government), defense (provided by the government), roads, bridges and other infrastructure (provided by the government), and then want to sit back as they pay nothing, complaining that the rich aren't paying "their fair share", when their share is zero?  What kind of idiot thinks there's anything "fair" in the system?
Apr 15, 2013 9:45AM
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The ones the loopholes were designed for will still make out. Get rid of the loopholes!
Apr 15, 2013 12:38PM
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There is no good reason for anyone to pay a 66% tax rate. Only the greed of the lowest class could warrant such a tax.
Apr 15, 2013 7:30PM
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The National Debt is already near 17 Trillion and soaring. So forget any talk about some flat tax under 20 percent. That's a pipe dream. Once Uncle Ben's gravy train of free money ends to the elite 1 percent and the economy collapses, folks will be begging to tax the top 1 percent at 50 percent or more. And it will happen. The only problem, what will be left once all the Global Money Printing runs it's course. What will actually have value at that point.
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