A case for lower top taxes

I recently claimed that it's difficult to argue that lower top marginal tax rates will raise economic growth. However, it doesn't follow from this at all that there's no argument for them. If I were a rightist, here's how I would argue for them.

The case for lower marginal rates is primarily one of justice. As Hayek and Nozick argued, state that takes a large chunk of your income is an oppressive one. Sure, in theory a high marginal tax rate can coexist with a low average rate, but in practice the two often do go together, especially for the very rich - and in a civilized society we should worry about injustices done to small minorities.

What's more, there's no obvious evidence that avoiding this injustice carries economic costs. Sure, Piketty and Saez claim (pdf) that an optimal top tax rate might be high. But optimality is a very high standard, and the costs of falling short of it are low; there's a great deal of ruin in a nation. And in fact, two things suggest lower top tax rates might be consistent with a healthy economy:

- In the very long-run, taxes affect social norms. A very high top tax rate might therefore eventually erode the sense of individualist self-reliance and work ethic and so - perhaps after a generation or two - depress growth; Assar Lindbeck has explored this possibility (pdf).

- A low top tax rate goes together will a smaller state. This is because the best way to tax the rich less is to tax everyone less. And there's some evidence that under some circumstances smaller government is good for growth.

Granted, there are reasons to think that lower top tax rates can depress growth. But these are less convincing arguments against them than you might think. For example:

"Lower top taxes incentivize rent-seeking and the creation of risk pollution." But they do so only because they interact with bad policies. Better corporate governance and an end to crony capitalism should be used to reduce rent-seeking. And better banking regulation or the end of the implicit state subsidy would reduce risk pollution.

" Lower taxes have an income effect which encourages wealth creators to retire or downshift." But this is a good thing. It shows that lower taxes increase people's real freedom to choose work or leisure. The left wants a basic income because it increases real freedom for the poor. Isn't it hypocritical to deny real freedom to the rich?

Now, I write all this to speak to left and right. To rightists, I'm saying that you don't need to argue that tax cuts for the rich will boost near-term growth. In fact, doing so only makes you look like a fanatical shill who doesn't much care about the data. To the left, I'm asking: what's so good about higher top tax rates? They might be a tolerable second-best policy in a world where inequality arises in "bad" ways, such as from risk pollution and exploitation. But I would rather live in a society with low pre-tax inequality and low tax rates. But I guess this is why I'm a Marxist rather than a social democrat.

Comments

[foosion]

>>state that takes a large chunk of your income is an oppressive one>>

Even if your success is due to the structure of the state and results in higher after tax income than an alternate state?

>>what's so good about higher top tax rates?>>

There are things government does better and progressive rates are better than flatter rares due to declining marginal utility and other factors.

>>I would rather live in a society with low pre-tax inequality and low tax rates>>

Dean Baker persuasively argues that government policy is responsible for much pre-tax inequality, for example, monetary policy, patent protection, trade policy, too big to fail subsidies, etc., etc.

[paulc]

"Lower top taxes incentivize rent-seeking and the creation of risk pollution." CD

I've read this on here before and unfortunately there never seems to be a link to this claim.
I'm a being a bit lazy here [it's the hot weather, I think] but I can't figure out from first principles why that should be the case.
Anyone?

[paulc]

>>state that takes a large chunk of your income is an oppressive one>>

"Even if your success is due to the structure of the state and results in higher after tax income than an alternate state?" foosion

Surely the fact that something impinges on your freedom/liberty [the big state] is entirely independent of whether it confers financial advantages or not?

[The Thought Gang]

@ foosian

Do you find that those who wish to attribute economic success to the platform provided by the state are rarely the same people who lay the blame for economic failure at those same stately shoes?

People have been successful and unsuccessful since long before there was a state. What the modern state does do, is set the parameters within which once can achieve success. Notably, I'd say, by limiting the use of swords, and loosening the grip of good fortune.

As a relatively young, but heavily taxed, person.. my perspective is that the state does a great deal more to assist those who have wealth to preserve it than it does to assist those without it to attain it. High taxes on income, in that light, are part of the problem. But I guess I would say that.

[Calum]

The main policy problem with high marginal tax rates is the fluidity across national boundaries. "Let's not try top win a race to the bottom" always sounds lovely but if you don't play the game then the wealth will be created, and taxed, elsewhere.

[rogerh]

Is not the problem that the Gummint has high fixed costs and a pressing problem how to meet them, nothing to do with social justice or incentives.

Dare not go for a smaller state 'cos we all vote lower-middle class and sod the growth. Dare not tax the rich for fear of damaging the little growth we have. The problem seems to be the high fixed costs of running UK plc coupled with the difficulty/impossibility of investing for long-term growth and the difficulty of winding down the fixed costs. Very tricky.

Now the world is very small and the pin factory goes to the cheapest - the human brain being much the same everywhere.
But here lies a justification for taxing the rich, if you like living here then pay a hefty tax - or sod off and live with your family in the hell hole where your money is made. Not so fast, not workable, every government wants a good helping of the rich, so we are back to that delicate balance.

Like it or not the rich are usually clever and active or hire those who are, the poor are frequently dull and hire no-one. What galls is the dull and rich staying that way. Herein lies the rub, how to increase the brain-power of GB plc - a vain exercise IMHO - any feasible scheme is doable by anyone else.

[Anonymous]

Low top tax rates increase leakages into savings and reduces demand.

Re-injecting these surplus incomes via taxing and spending ensures that the money is not removed from circulation, and has a positive impact on GDP. So high marginal top tax rates are most likely to be beneficial - sufficiently beneficial to more than offset the alleged disincentive effects