During World War II, the US saw huge economic growth, and the top tax rates were way higher than now—like over 90%. It continued through the 1950s and early 60s. Does taxing the very top earners more actually help, or could it hurt the economy? Curious to hear thoughts.
Diamond and Saez suggest taxing the ultra-rich to maximize revenue. Combining federal, state, and local taxes, they estimate the ideal rate is 73%. Another study from Gruber and Saez accounts for local taxes and estimates the federal rate should be around 48%. That’s not far off from the current 37% top rate.
@Tyler
In my country, we hit 48% on incomes over 75k. Add social security, and you’re keeping maybe 40% of each dollar earned above that point. Feels like a real disincentive to work more.
Hadley said:
@Tyler
In my country, we hit 48% on incomes over 75k. Add social security, and you’re keeping maybe 40% of each dollar earned above that point. Feels like a real disincentive to work more.
But we’re talking about people making way more than 75k. The focus here is on individuals making millions a year. Taxing those ultra-high earners is a totally different conversation than taxing the middle class.
@Micah
How many people do you think actually earn $7.5M a year? Like 10,000? The real money comes from taxing incomes below a few hundred thousand.
Also, you mentioned net worth—do you think we should tax net worth directly? How would that even work?
@Sterling
The number doesn’t matter for the argument here. And no, I don’t think we should tax net worth directly. I prefer a progressive consumption tax instead.
Micah said:
@Sterling
The number doesn’t matter for the argument here. And no, I don’t think we should tax net worth directly. I prefer a progressive consumption tax instead.
A consumption tax? Never thought of that. Can you explain how that would work?
@Sterling
It’s basically taxing what people spend instead of what they earn. You can make it progressive by giving exemptions for basic needs like food or by providing rebates. Economists tend to like it because it doesn’t discourage saving or investment.
@Micah
To be fair, the commenter did say the high tax rates kick in at 75k in their country. That’s rough.
Quinn said:
@Micah
To be fair, the commenter did say the high tax rates kick in at 75k in their country. That’s rough.
Yeah, but that’s more about the structure of their country’s tax system. It’s not an argument against taxing ultra-high earners more.
Rowan said:
@Tyler
Wait, so 48% vs 37% isn’t wildly different? Seems like a big jump to me.
It might not feel that different in practice, especially after deductions. But yeah, in places like California, state taxes push the combined rate way higher.
@Casey
Good point. California has higher income taxes but lower property taxes compared to places like Texas, where there’s no income tax but property taxes are huge. It evens out more than people think.
The issue with the 1950s and 60s tax rates is that nobody actually paid those numbers. There were tons of loopholes that brought effective tax rates way down.
Harley said:
The issue with the 1950s and 60s tax rates is that nobody actually paid those numbers. There were tons of loopholes that brought effective tax rates way down.
That’s true, but those deductions also encouraged businesses to invest in payroll, growth, and other things that benefited the economy. Now, companies just spend money on stock buybacks instead.
@Zayden
The real issue is that income taxes are inefficient. Public finance experts argue taxes like consumption taxes or land value taxes are much better for the economy. The wealth inequality you’re talking about stems more from low interest rates driving up asset values.
You’re missing the key point: increasing taxes beyond a certain level leads to more tax evasion, which costs everyone. Enforcing taxes effectively is just as important as setting the rates.
Wilder said:
You’re missing the key point: increasing taxes beyond a certain level leads to more tax evasion, which costs everyone. Enforcing taxes effectively is just as important as setting the rates.
Exactly. As you approach the revenue-maximizing tax rate, more resources go into dodging taxes. The ideal tax rate is lower than the revenue-maximizing one because of this wasted effort.
If taxes get too high, won’t the ultra-rich just move to countries with lower rates? We’ve seen this happen in places like Norway where wealthy individuals are leaving for tax havens.
Will said:
If taxes get too high, won’t the ultra-rich just move to countries with lower rates? We’ve seen this happen in places like Norway where wealthy individuals are leaving for tax havens.
There are huge benefits to living in countries like the US, so most people don’t leave. Even with other citizenships, there are limits to how much they can dodge taxes.