Myth of the Day: Raising Tax Rates on the Rich will Not Harm the Economy

American Legislator ^ | 7-30-13 | Will Freeland

[ThethoughtsofGreg]

As states consider fundamental tax reform this session, misconceptions about sound tax policy abound. Perhaps one of the most popular misconceptions is the notion that raising tax rates on the rich will not harm the economy. In Tax Myths Debunked, co-authors Dr. Eric Fruits and Dr. Randall Pozdena use extensive evidence to demonstrate that taxing higher-income earners will certainly not generate economic growth and will not close the gaping budgetary gaps that plague many states governments as well as the federal government.

Dr. Pozdena, former vice president of research at the Federal Reserve Bank of San Francisco, and Dr. Eric Fruits find that taxing higher-income earners does not generate as much revenue as one might anticipate. These economists looked at how much revenue a generic 10 percentage point tax increase would generate on various levels of income earners in the country as a whole, assuming no behavioral response to such a tax increase:

Taxing the incomes of the top 1 percent of taxpayers would only yield $93.8 billion (these are taxpayers with incomes about $380,000.)

Taxing the incomes of the top 5 percent of taxpayers would only yield $180 billion (these are taxpayers with incomes over $150,000.)

Taxing the top 10 percent of taxpayers would yield $340 billion (these are taxpayers with incomes about $110,000.)

[BenLurkin]

[SkyDancer]

FDR did that in 1936 - went to 63% and put the US into a double Depression. We were just coming out of it and he puts that tax rate on high wage earners.

[Age of Reason]

We seemed to do OK with an even higher tax rate in the 1950s. In fact, 1950s was probably the best decade America’s middle class ever had.

[Age of Reason]

Let’s tax those who make more than a million a year at 90%.

Then redistribute the money so gained by taxing the rest of us less, so we have more spending money.

Still bad for the economy?

[SkyDancer]

Well just saying what happened in 1936 and a Depression within a Depression caused by that tax increase. It killed whatever progress was being made.

[drbuzzard]

Yes, because that’s assuming demand side economics works (ie Keynesianism). It doesn’t Economies grow via productivity gains. That means investment and risk taking to spur innovation. That investment and risk taking are what produces the large incomes. If you remove the incentive for the risk taking, you strangle growth.

You are advocating income re-distribution. You sure you are on the correct web site?

[drbuzzard]

It should be noted that the 1950s are rather anomalous. They were a time when all industrial competition had either been bombed flat/razed (continental Europe and Japan) or were choking themselves with socialism (UK).

In any case the tax rates in that era had much more in the way of deductions available so it is like comparing apples and oranges.