Mathematical Malpractice Watch: Marginal Taxes

I’ve noticed a little flaw in commentary lately. The Left Wing, in their push to raise taxes, are citing work like this, which claims the Laffer Curve peaks at 50-70% and therefore we could massively raise taxes on the wealthy.

Let’s put aside that you never want government taxation rates to be at the peak of the Laffer Curve (it leaves you zero fiscal room for emergencies and means you’re crippling the economy but not quite enough to depress tax revenue). The problem is that we already pretty close to that peak. For the very wealthy, the marginal income tax rate is 35%. Medicare tax is another 2.9% (employer+employee). We’ll ignore Social Security tax under the assumption we’re just dealing with millionaires. Then you have state income taxes, which range from 0% in states like Texas to a top marginal rate of 11% in Oregon and Hawaii. So marginal tax rates are currently at 38-49%, which is pretty much the lower bound of what the rather optimistic Diamond and Saez say is the peak of the Laffer Curve. And since it’s a Laffer Curve, not the Laffer Triangle, it starts bending before it rolls over, so we’re probably getting within shouting distance of peak revenue already.

I’m not saying whether we should or should not raise taxes (I’ve come out on the other blog in favor of raising them on everyone since I see little alternative given our present circumstances). But let’s at least debate honestly about where we are on marginal rates, huh?

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