The Problems with "Soak the Rich"

You may be getting a bit tired of the left-of-center material I've featured as of late, so I figured we'd try a change of pace here. The American Enterprise Institute has a recent publication on how various legislative measures aimed at increasing the tax burden of the top income earners in the US are bound to backfire. One of their arguments is that the top one percent of earners already shoulder a quarter of the US federal tax burden as depicted by this pie chart:


Another argument they make is that capital formation will be impeded if the top 1 to 2% of earners are more heavily taxed. By all means, do read the whole article if you're interested. I can't say that I necessarily buy this line of argument, but it's worth considering nonetheless:

Democratic presidential candidates and members of Congress are vying with one another to raise marginal tax rates for high-income earners, particularly the top 1 or 2 percent of taxpayers. A careful review of economic theory and evidence suggests that raising tax rates at the top is an inefficient and undesirable way to generate revenue.

A number of recent proposals would raise individual income tax rates for the 1 or 2 percent of Americans with the highest incomes. Proponents argue that these proposals will generate significant revenue from those who can best afford to pay more while sparing 98 percent of the population any burden. Economic analysis, however, shows that rate increases at the top are likely to impose significantly greater economic harm than other tax increases, with much of the harm falling on those who are not in the top income groups.

High-income Americans already bear a surprisingly large share of the nation’s tax burden. Moreover, raising additional revenue from this group would require steep increases in marginal tax rates, which pose large economic distortions relative to revenue raised. Economic models of optimal income taxation indicate that these distortions may make rate increases at high income levels undesirable, even if the government puts a strong emphasis on transferring income to the poor. The conclusion is dramatically strengthened by considering the impact of such rate increases on capital formation, an effect not included in these models. By reducing the capital stock, rate increases at the top drive down wages, imposing costs on workers at all income levels.

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