Should the wealthy pay a higher tax rate than they currently do?

Both sidesSays it is contestedSources conflict

The American University report says higher top marginal rates raise revenue and cut inequality without hurting growth, while AEI argues higher taxes on the wealthy may not work and the system is already progressive.

This question has strong arguments on both sides — I'll pull current tax-rate data and reform proposals to compare them fairly.

Whether the wealthy should pay a higher rate than they currently do is debated, and depends on goals such as revenue, inequality, fairness, and economic growth. Current rates and the main arguments are:

Current U.S. Tax Rates on High Earners

•The federal income tax has seven rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top marginal rate is currently 37%.

•Under the 2017 Tax Cuts and Jobs Act (TCJA), the top rate was decreased from 39.6% to 37%. Making the 37% rate permanent instead of allowing it to revert to 39.6% would reduce annual federal revenue by approximately 2.24 percent after 10 years.

•On an average effective rate basis, Treasury estimates for 2024 show the top 1% will pay an average rate of 31.5 percent for all federal taxes, compared with 10-12 percent in the middle and about 0 percent at the bottom.

•The average tax rate on the top 1 percent has hovered around 30 percent for four decades.

•Capital income is taxed at lower statutory rates than labor: The top federal marginal tax rate on long-term capital income is 23.8% while the top marginal ordinary income and payroll tax rates on wages is 40.8%.

•State and local taxes are less progressive: average rates are 11.4 percent for the poorest 20 percent; 9.9 percent for the middle 20 percent; and 7.4 percent for the richest 1 percent.

•For the very richest, recent research found the total effective tax rate for the 400 wealthiest Americans fell from 30% in 2010-2017 to 23.8% in 2018-2020, largely because they were able to shelter more business income.

Proposals to Raise Rates

•President Joe Biden proposed a "Billionaire Minimum Income Tax" - a minimum 20% tax rate that would hit both the income and unrealized capital gains of U.S. households worth more than $100 million.

•If enacted, that tax would generate an estimated $360 billion in new revenue over the next decade.

•Other models have considered raising the top marginal income tax rate to 50%. One Brookings simulation estimated it would generate $95.6 billion in additional revenue, with $110,968 additional taxes for households in the top 1 percent and $568,617 for the top 0.1 percent.

•A report from American University's Institute for Macroeconomic and Policy Analysis found increasing the top marginal rate to 44% would yield annual revenue gains of about 3.1 percent with no discernible costs in terms of GDP, private investment, or wages.

Arguments Commonly Made FOR Raising Rates on the Wealthy

1.Revenue: Modestly raising the top marginal tax rate would raise revenue and decrease inequality without stifling growth. Government revenue is needed to support education, health and human services and public safety.

2.Inequality and Fairness: Maintaining the TCJA's cut would increase the share of national income going to the richest 1% by approximately 1.3 percent while shrinking the income share of the bottom 50% by 0.5 percent. Proponents argue that capital is lightly taxed in the U.S. compared to earned income and therefore taxing wealth more would offset that advantage. Public polling has found by two-to-one (44% to 22%), the public says that raising taxes on incomes above $250,000 would help the economy rather than hurt it, and a similar share says it would make the system more fair.

3.Limited Growth Effects: Research cited by some economists finds there is no compelling empirical evidence that lowering effective tax rates on the wealthy leads to meaningful increases in real economic activity — whether in the form of productive investment or high wages for workers. Decades of evidence show that the tax rates of high-income households are unrelated to economic growth according to those studies.

Arguments Commonly Made AGAINST Raising Rates on the Wealthy

1.Already Progressive Federal System: Official sources find that tax rates on high earners are much higher than tax rates on lower- and middle-income folks. Average tax rates at the top are twice the tax rates in the middle.

2.Behavioral Responses and Revenue Efficiency: Economists caution that people may change their behavior when tax rates increase: they can work less and thus dampen the revenue effects from increased taxation, they can shift income into nontaxable forms, such as employer-sponsored health insurance, and they can underreport income.

3.Capital Formation, Investment and Mobility: Opponents argue higher marginal rates, especially on capital gains, dividends, and estates, could reduce savings, investment, entrepreneurship, and cause capital or high earners to move to lower-tax jurisdictions. They also point to double taxation of corporate income and concerns that wealth taxes would be difficult to accurately measure wealth and thus taxes due.

4.Modest Impact on Inequality Alone: Even supporters' models show limits: One Brookings simulation found that raising the top rate to 50% and redistributing all new revenue to the bottom 20% would boost income for the bottom but the resulting effects on overall income inequality are exceedingly modest, with the Gini coefficient dropping only from 0.574 to 0.560.

In practice, many proposals try to balance these considerations by targeting specific sources of income — such as closing loopholes on unrealized gains, stepped-up basis at death, or limiting deductions for business income — rather than raising the statutory marginal rate alone.

Citations (3)

1american.eduAcademic
New Report: The Top Marginal Income Tax Rate Drives Government Revenue and Inequality, but Not Growth | American University, Washington, DC
Backs: “Tax Rates on High Earners. The federal income tax has seven rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top marginal rate is currently 37%.”
evidence, article, points to yes. Claim: Raising the top marginal rate (e.g., to 44%) would raise revenue and reduce inequality with no discernible costs to GDP, investment, or wages; also attached to federal rate structure.
2cato.orgNonprofits and think tanks
Fact-Check: Taxes on the Rich | Cato at Liberty Blog
Backs: “Making the 37% rate permanent instead of allowing it to revert to 39.6% would reduce annual federal revenue by approximately 2.24 percent after 10 years. On an average effective rate basis, Treasury estimates for 2024 show the top 1% will pay an average rate of 31.5 percent for all federal taxes, compared with 10-12…”
statistic, article, points to no. Claim: Treasury estimates show the top 1% pay an average 31.5% federal tax rate, and the top rate's permanence costs about 2.24% of revenue, indicating a progressive system.
3aei.orgNonprofits and think tanks
Why Higher Taxes on the Wealthiest May Not Work
Backs: “Already Progressive Federal System: Official sources find that tax rates on high earners are much higher than tax rates on lower- and middle-income folks. Average tax rates at the top are twice the tax rates in the middle. Behavioral Responses and Revenue Efficiency: Economists caution that people may change their…”
attribution, article, points to no. Claim: Opponents argue tax rates on high earners are already much higher than middle earners, and behavioral responses may dampen revenue from increases.