Opinion | The Economics of Soaking the Rich

In that case, nevertheless, why can we care how laborious the wealthy work? If a wealthy man works an additional hour, including $1000 to the economic system, however will get paid $1000 for his efforts, the mixed revenue of everybody else doesn’t change, does it? Ah, however it does — as a result of he pays taxes on that additional $1000. So the social profit from getting high-income people to work a bit tougher is the tax income generated by that additional effort — and conversely the value of their working much less is the discount in the taxes they pay.

Or to place it a bit extra succinctly, when taxing the wealthy, all we should always care about is how a lot income we elevate. The optimum tax fee on folks with very excessive incomes is the fee that raises the most potential income.

And that’s one thing we are able to estimate, given proof on how responsive the pre-tax revenue of the rich truly is to tax charges. As I stated, Diamond and Saez put the optimum fee at 73 p.c, Romer at over 80 p.c — which is in keeping with what AOC stated.

An apart: What if we bear in mind the actuality that markets aren’t completely aggressive, that there’s rather a lot of monopoly energy on the market? The reply is that this virtually absolutely makes the case for even increased tax charges, since high-income folks presumably get rather a lot of these monopoly rents.

So AOC, removed from displaying her craziness, is totally according to severe financial analysis. (I hear that she’s been speaking to some superb economists.) Her critics, on the different hand, do certainly have loopy coverage concepts — and tax coverage is at the coronary heart of the loopy.

You see, Republicans virtually universally advocate low taxes on the rich, based mostly on the declare that tax cuts at the prime can have enormous helpful results on the economic system. This declare rests on analysis by … properly, no one. There isn’t any physique of severe work supporting G.O.P. tax concepts, as a result of the proof is overwhelmingly towards these concepts.

Look at the historical past of prime marginal revenue tax charges (left) versus development in actual GDP per capita (proper, measured over 10 years, to easy out short-run fluctuations.):

Source link Nytimes.com

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