In an interview with WSJ’s Jon Hilsenrath, MIT professor Simon Johnson calls for higher income-tax rates as part of a “fiscally conservative” plan to shore up the U.S. budget in the long run. “We have lost track of the fact that deficits do in fact matter…,” he says.
Raising rates on the rich will not hurt economic growth. That’s a lie.
Two brilliant economists – Peter Diamond and Emmanuel Saez – write that we need to raise rates on the rich – the WSJ has the story:
According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70% (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.
But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. Indeed, according to the U.S. Department of Commerce’s Bureau of Economic Analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68% between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23% between 1950 and 1980 when top tax rates were at or above 70%.
This chart shows a correlation between the cutting of the top marginal rates on the rich with an explosion of the deficit:
And even though you often hear the canard that America is a high tax country – that’s ridiculous. Looking at EFFECTIVE rates (or your taxes minus deductions of which there are MANY) – the U.S. actually enjoys low tax rates:
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