According to a new briefing paper from EPI Federal Budget Policy Analyst and Century Foundation Fellow Andrew Fieldhouse, raising top marginal income tax rates would increase revenues and slow the growth of income inequality while having little to no effect on economic growth.
In A review of the economic research on the effects of raising ordinary income tax rates, Fieldhouse examines recent research and concludes that it does not support claims that raising top tax rates will necessarily slow economic growth. Reductions in U.S. top tax rates have been found to have no statistically significant impact on overall growth, but have led to a significant increase in income inequality. After decades of tax cutting, it is clear that the top federal tax rate is well shy of its revenue-maximizing rate, which research suggests is roughly 69 percent.
“The case for higher tax rates is strengthened by today’s economic climate as well as political calls for austerity,” said Fieldhouse. “Job creation should be prioritized over deficit reduction, but collecting more revenue from upper-income households would be the least economically damaging way to reduce deficits. Rising income inequality and diminished revenue as a result of the Bush-era tax cuts also make a strong case for top tax rates higher than the Clinton-era 39.6 percent.”
In addition, broadening the tax base by eliminating loopholes would decrease opportunities for tax avoidance and increase the revenue maximizing tax rate. While the conventional wisdom surrounding tax reform calls for broadening the tax base and lowering tax rates, economic research suggests otherwise. Increasing revenue, making the tax code more progressive and pushing back against inequality will be easier tasks if policymakers realize that raising marginal rates and broadening the tax base are compliments, not substitutes.