Out of Control Policy Blog

If You're Still Doubtful That Soaking the Rich Is Bad for the Economy...

... you might want to check out this study (HT: Tyler Cowen), which concludes that:

... we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised. (emphasis added)

In other words, the cost to the economy (in terms of decreased economic activity) of taxing the rich at higher rates is so high, it destroys more wealth than it transfers to the government. I've noted the problem of deadweight losses from income taxes several times, but the size of the effect here is significantly higher than previous estimates.

This is a frightening result, and one that will surely provide some good ammunition for tax hike opponents when this issue rolls around again in two years.

David Godow is Research Assistant


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