Saturday, May 12, 2012

WSJ promotes higher taxes on the rich!?!?

The share of pre-tax income accruing to the top 1% of earners in the
U.S. has more than doubled to about 20% in 2010 from less than 10% in
the 1970s. At the same time, the average federal income tax rate on top
earners has declined significantly. Given the large current and
projected deficits, should the top 1% be taxed more? Because U.S. income
concentration is now so high, the potential tax revenue at stake is

But will taxable incomes of the top 1% respond to a tax increase by
declining so much that revenue rises very little or even drops? In other
words, are we already near or beyond the peak of the famous Laffer
Curve, the revenue-maximizing tax rate?

The Laffer Curve is used to illustrate the concept of taxable income
"elasticity,"—i.e., that taxable income will change in response to a
change in the rate of taxation. Top earners can, of course, move taxable
income between years to subject them to lower tax rates, for example,
by changing the timing of charitable donations and realized capital
gains. And some can convert earned income into capital gains, and avoid
higher taxes in other ways. But existing studies do not show much change
in actual work being done.

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.

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