James Pethokoukis | New study shows why heavily taxing the rich won’t work

It’s strange when you think about it. Not only is President Obama pushing the largest round of tax hikes in almost a generation, but those increases would come during the most anemic economic expansion since World War Two — or maybe ever in American history. Still, the White House appears not at all concerned that raising the tax burden and hiking marginal tax rates would make a sickly economy even weaker. Nor is Team Obama concerned, apparently, about the risk of raising the long-term tax burden at a time when demographic changes will begin making it harder for the US economy to grow as fast in the future as it has in the past.

How can Team Obama be so preternaturally carefree and nonchalant about its taxapalooza?

One big reason is research from two highly respected — and left-of-center — economists, Peter Diamond and Emmanuel Saez. (Diamond is a failed Obama nominee to the Federal Reserve Board, while Saez is perhaps best known for his work on income inequality with Thomas Piketty.) In their paper, “The Case for a Progressive Tax,” they contend that the top federal income-tax rate in the US could more than double to 73% from 35% today without hurting economic growth. To put it another way, the US is nowhere close to the top of the Laffer Curve, where higher tax rates start lowering tax revenues. If Diamond and Saez are correct, raising the top marginal rate to roughly 40% (actually closer to 43% when you account for other tax code changes), as Obama wants to, is no problemo.


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