Tax Cutting to a Top-Heavy Society
Anthony Atkinson and Andrew Leigh, The Distribution of Top Incomes in Five Anglo-Saxon Countries over the Twentieth Century, Institute for the Study of Labor, Bonn, Discussion Paper No. 4937, May 2010.
Conservatives who oppose any move to raise taxes on the rich inevitably swing back to one central pitch. Taxing the rich, they argue, will always be a futile exercise. So why bother? Arthur Laffer, analyst who inspired the Ronald Reagan tax cuts, made just this point earlier this month in a Wall Street Journal op-ed.
Unlike average taxpayers, Laffer wrote, taxpayers in the top tax brackets can minimize their income come tax time “by hiring lawyers, accountants, deferred income specialists, and the like.” These wealthy taxpayers can routinely “change the location, timing, composition, and volume of income to avoid taxation.”
At one level, Laffer’s observation rings true. The wealthy certainly do use their wealth to create and exploit tax loopholes. But this conniving never stops. The rich connive to avoid taxes when tax rates on high incomes run high. They connive when these tax rates run low.
By lowering tax rates on the rich, a society simply leaves rich people with much more money in their pockets — and a much greater share of the nation's income. But how much greater a share?
That’s a question Oxford economist Anthony Atkinson and the Australian National University’s Andrew Leigh explore in this detailed new analysis of nearly a century of tax-the-rich history in five major English-speaking nations, the United States, Britain, Canada, New Zealand, and Australia.
In all five of these societies, the share of national income rushing into top 1 percent pockets dipped significantly in the mid 20th century and then increased mightily. What explains this changing income share for the top 1 percent?
Above all else, taxes — or rather, the higher tax rates on the rich in effect a half century ago and the much lower rates on the rich in effect over recent years.
These recent reductions, calculate Atkinson and Leigh, “explain between one third and one half of the rise in the income share of the richest 1 percent.”
The United States hasn't taxed top-bracket income at over 39.6 percent since the mid 1980s. Governments that tax top-bracket income at no more than 40 percent, Atkinson and Leigh charge, are kissing away up substantial amounts of the revenue “they could potentially raise from the richest percentile group.”
In fact, the two add, the five nations they studied could raise their top-bracket tax rate to between 63 and 83 percent and still not lose any overall revenue.
“This suggests,” they conclude, “that in all five Anglo-Saxon countries, the tax rate paid by the top percentile group in the early-2000s was well below the revenue-maximizing point.”
This suggests, we ought to conclude, that our rich have seldom had it so good.