In a recent article Is ‘Tax the Rich’ Good Policy? (ODT 25 April 2011), I made the point that those in the top income brackets in New Zealand are already taxed relatively heavily by international standards.
I also noted that because cuts to high tax rates encourage economic growth and reduce tax avoidance, they may actually produce more government revenue.
And I quoted President John F Kennedy who said, when cutting US tax rates in the 1960s, “It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run is to cut rates now.”
This chart from Mark Perry’s blog Carpe Diem illustrates these points.
As Perry comments:
The chart above shows the relationship over time (from 1979 to 2007) between: a) the top marginal income tax rate, and b) the share of total income taxes paid by the top 1%). In 1979 the top marginal income tax rate was 70% and 18.3% of the total taxes paid were collected from the top 1% of taxpayers. By 2007 the top tax rate was 35% (half of the 1979 rate), and the tax share of the top 1% had more than doubled to 39.5% (from 18.3% in 1979).
The historical record shows an inverse relationship between the highest marginal income tax rate and the share of taxes collected from “the wealthy.” It’s a relationship to keep in mind during the current tax policy debate, where Obama wants to increase tax revenues by raising tax rates for “the rich,” and Rep. Ryan alternatively suggests a cut in the top marginal rate to stimulate economic growth, which would likely increase tax revenues from the wealthy, and increase overall tax revenue.
Note that this is not a Laffer curve argument that tax cuts are self-funding. Normally they aren’t. However, the loss of revenue over time from cutting inefficient taxes is less than the initial static loss because they encourage economic growth and expand the tax base.
Note also that higher income people pay more – a lot more – even with a flat or proportional tax. Leaving aside the likelihood in practice of more favourable treatment for those at the bottom, a person on $25,000 pays $2,500 in tax under a simple flat 10% rate whereas someone on $250,000 pays $25,000.