Amity Shlaes writes that history shows that raising taxes on the rich could prove counterproductive as a higher tax rate for the highest income group could lead to the perverse result of decreasing tax receipts. Shlaes even suggests that lowering the top rate even further might actually increase tax revenue.
… Raise the rates too high, and you get a perverse result: less money from the rich than you expect. Lower the rates, and the rich pay a greater share of the taxes. Treasury Secretary Andrew Mellon found that when he cut rates down to 25 percent, he got the most revenue of all.
But logic couldn’t always suppress instinct. Each year, lawmakers felt that need to demonstrate they were increasing progressivity even more than they felt the need to get an optimal result. Each year that need had to find expression. Within a generation the top rate was back in the 70s, reaching 91 percent in the 1950s. This proved inefficient. Taxpayers found ways around the statutory rates. Again, the reform didn’t work.
In more recent springs, both Democrats and Republicans have developed a compromise repentance to accommodate some reality. The lawmakers discovered, as Mellon had, that by talking about helping the poor, but keeping the actual top rates lower, they got an outcome that was splendidly progressive.
In 1980, the top 1 percent of earners paid 19 percent of income taxes, and the bottom half of earners paid 7.1 percent. A decade later, with a lower maximum rate, the top 1 percent paid 25 percent of taxes, while the bottom earners paid just 5.8 percent. By 2008, top earners paid 38 percent of taxes, the bottom half 2.7 percent.
What about today? It might make sense to cut taxes even more, down to, say, a top rate of 20 percent. Then the rich would pay all the taxes. And there would be more revenue, as foreigners came in.
However, as Charlotte Hays suggests, although lower rates may in fact lead to higher tax revenues, this doesn’t matter to those who “see higher taxes as the end, not the means.”