Is $3 Billion A Lot or a Little?

by Reihan Salam

Matt Yglesias highlights the effective tax rate paid by the 400 highest earning individuals between 1995 and 2007, noting that the number has steeply declined:

This is only 400 people so it’s not like you can balance the budget just by soaking them, but “If the richest 400 Americans simply paid the same effective rate in 1995 as they did in 2007, the government would have collected over $3 billion in additional revenue.” That’s not nothing.

Judging by the chart, the effective tax rate has gone from 29.3 percent to 16.62 percent. Matt also notes that the collective income of the 400 highest earning individuals has gone from $6 billion to $22.9 billion over this same period. (I’d like to know if 2007 was a local peak, in light of the financial crisis that followed. But this doesn’t change the basic point.) 

What I’d like to know before drawing any conclusions: is the fact that income soared as the effective tax rate declined a coincidence? And while $3 billion in additional revenue is indeed not nothing in a vacuum, is it something when compared to the wealth generated by the 400 not only for themselves but for others? I can’t say conclusively, but my guess is that raising that $3 billion would have discouraged much more than $3 billion in productive economic activity. If every dollar in revenue causes an excess burden of taxation of 1x (with x > 1, wiseguys), I’d suggest that the declining effective tax rate has been a good thing. 

But I also believe that a marginal tax schedule that rises and then declines at higher income levels wouldn’t necessarily be such a bad thing, depending on our assumptions about the elasticity of taxable income (e.g., 15 percent, 25 percent, 20 percent). This is very much a fringe view.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.