Annie Lowrey on the Millionaire’s Tax Bracket

by Reihan Salam

My friend Annie Lowrey has graciously responded to my post on her idea for a new millionaire’s tax bracket. It should go without saying that much of our disagreement rests on differing interpretations of evidence that isn’t necessarily crystal-clear in its implications and, of course, different gut instincts on the underlying normative questions. This is one of those cases where sensible people agree to disagree. I do, however, have a few additional thoughts.

One thing I’ll note briefly is that while Annie characterizes my post as the conservative response to her argument, I should emphasize that (a) it’s just my own response, not the response of conservatives per se, and that (b) I actually think savvy conservatives might want to embrace Annie’s idea insofar as it will undermine efforts to create a more egalitarian, social-democratic U.S. for the reasons sociologist Prasad and economist Lindert suggest. That is, I think a high MTR world will engender a stronger political backlash to the expansion of government than a low MTR world, in part because it will have more baleful consequences for overall growth. 

I realize that very few on the left will embrace this argument, particularly those who are not familiar with the post-war history of the the major European economies (unlike Annie, who is very familiar with this history yet who backs high marginal tax rates nonetheless).

On the disincentives to earn, Annie writes:

Reihan’s second point is that a more-progressive income tax, the kind I laid out, would not raise that much money. This is neither here nor there. It would raise billions of dollars. A dollar is a dollar. And at some point, the government needs to raise money from somewhere. Given the dramatic growth of income inequality, I would argue raising income taxes a bit on the very wealthy is a decent place to look. (Reihan also quotes Alan Viard arguing that increasing income taxes also increases the disincentives to earn. I don’t debate this, but also don’t see it as terribly relevant. The Laffer Curve bends somewhere, but not at 39.6 percent.)

I certainly agree that a dollar is a dollar. But some taxes will raise the same number of dollars without creating the same disincentives to earn, e.g., an increase in consumption taxes or in the basic income tax rate from, say, 10 percent to 11 percent. Again, I don’t expect this to be politically popular, but flatter consumption taxes on everyone are generally a better bet for growth than steeper income taxes on the fortunate few. (Seth Giertz discusses some of these issues in Tax Policy Lessons from the 2000s.)  

And I also don’t think we want to go anywhere near the point at which the Laffer Curve bends, for the reasons Arpit Gupta has outlined:


Uhlig and Trabandt explore this issue further. In particular, they finds that 32% of a labor tax cut, and 51% of a capital tax cut are self-financing, in the sense that lowering those taxes raises economy activity, which itself generates additional taxes, and partially offsets lower tax revenue.

By the same token, higher taxes – particularly higher capital gains taxes – will reduce economic activity, especially in the long run. This will result in a substantial amount of foregone income, as a result of the “deadweight loss” incurred through taxation. As the tax rate approaches the top of the Laffer curve, this loss grows higher and higher.

In other words, future tax hikes, which are necessary to pay for the projected path of spending, will come at a high cost. Even if they are sufficient to balance the budget and eliminate the deficit, and even if higher tax rates still result in more revenue, high taxes will still result in less output for all Americans.

One could conclude that this is fine, and that we should focus exclusively on raising more revenue regardless of the impact on output. And note that as Arpit explains, increases in labor taxes aren’t generally as bad as increases in capital taxes. Part of Annie’s argument, interestingly, is that we should accept lower capital taxes as part of a broader bargain, which seems smart to me. My take on the evidence nevertheless leads me to conclude that high marginal tax rates on income should be avoided, and that a millionaire’s bracket would do far more harm than good.