Emmanuel Saez on Optimal Tax Rate - Dictionary of Arguments
Saez I 134
Optimal Tax Rate/Saez/Zucman: (...) a body of work suggests that the top marginal tax rate that collects the most revenue possible from the rich hovers around 75%. By the rich we mean the members of the top 1%, people with more than $500,000 in income in 2019.(1) This estimate is the best that exists today on the basis of many empirical studies conducted over the last two decades. If there are limited tax-avoidance opportunities, the rich respond only modestly to tax changes: whenever their keep rate rises by 1% (instead of keeping 70 cents after taxes out of any extra dollar earned, they keep 70.7 cents), they work harder and increase their pre-tax earnings by about 0.25% in response.8 This means that the tax base does not shrink much when the rich are taxed more heavily, implying optimal top marginal tax rates in the vicinity of 75%.(2)
1) (...)we’re talking about a marginal tax rate, a rate applied only to income earned above a high threshold, $500,000 today. The associated average tax rate is lower than that, because any dollar earned below this high threshold is taxed less. It’s only for the ultra-wealthy that marginal and average tax rates are the same.
Example: (...) if tomorrow the marginal tax rate on income above $500,000 were increased to 75%, the average tax rate of the top 1% richest Americans would reach 60%.(3) In other words, the optimal average tax rate on top bracket taxpayers is 60% - less than 60% for people at the bottom of the top 1%, up to 75% for the ultra-rich, and 60% on average among top one percenters.
Given that the average macroeconomic tax rate is around 30%, an average rate of 60% means that the top 1% richest Americans would pay twice as much in tax, as a fraction of their income, as the average person.
2) (...) these optimal tax rates take into account all taxes, at all levels of government. Since payroll taxes are capped and sales taxes are insignificant at the top, the optimal top marginal rate of 75% should be thought of as combining the federal income tax, any state income taxes, and the corporate income tax.((s) Saez and Zucman are talking about the USA.)
Saez I 135
3) Hiking top tax rates without any other change to the tax code or to enforcement would be a bad idea. The supply of tax dodges in circulation is too large. Before we can effectively tax the wealthy more, avoidance must be curtailed. We need to create the institutions that make a robust tax system sustainable in the long run, even in the era of extreme inequality. Cf. >Ramsey Rule, >Tax evasion.
1. See Diamond and Saez (2011) for a summary of the theoretical analysis:
-Peter A. Diamond and Emmanuel Saez. “The Case for a Progressive Tax: From Basic Research to Policy Recommendations.” Journal of Economic Perspectives 25, no. 4 (2011): 165–190.
2. Saez, Slemrod, and Giertz (2012) review the empirical literature and show that large documented behavioral responses to tax changes always arise from tax avoidance.
- Emmanuel Saez, Joel Slemrod, and Seth Giertz. “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review.” Journal of Economic Literature 50, no. 1 (2012): 3–50.
In the case of tax systems with few avoidance opportunities such as Denmark, behavioral responses to tax changes are quantitatively small with elasticities in the range of 0.2–0.3 for top earners (Kleven and Schultz, 2014):
-Hendrik Kleven and Esben Anton Schultz. “Estimating Taxable Income Responses using Danish Tax Reforms.” American Economic Journal: Economic Policy 6, no. 4 (2014): 271–301.
3. The average income above $500,000 is approximately $1,500,000 (Piketty, Saez, Zucman 2018):
-Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. “Distributional National Accounts: Methods and Estimates for the United States.” Quarterly Journal of Economics 133, no. 1 (2018): 553–609.
Hence top bracket taxpayers would pay 75% on $1,000,000 and a lower rate on their first $500,000. If we assume that the tax rate on their first $500,000 is the average macroeconomic tax rate of 30%, this gives a total tax rate on top bracket taxpayers taxpayers of (2/3) × 75 + (1/3) × 30 = 60%._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.