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.
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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