No single "should" exists—it depends on goals (revenue, equity, growth, fairness), values, and evidence about trade-offs. Higher statutory or effective rates on high earners can raise revenue and reduce inequality in some settings, but they also risk behavioral responses (less work/investment, more avoidance/evasion, capital flight), deadweight loss, and slower growth if poorly designed. Data and research show mixed, context-dependent results rather than a universal answer. Below is a fact-based overview.
Current Tax Reality (Primarily US-Focused; Similar Patterns Elsewhere)
•Statutory rates: The US federal top marginal income tax rate is 37% (plus 3.8% Net Investment Income Tax for many high earners, and state taxes that can push combined rates over 50% in places like California/New York). Corporate rate is 21%. Historically, top rates were much higher (70–90%+ in mid-20th century), but with far more loopholes; effective rates were lower.
•Effective rates: The wealthy often pay lower effective rates than statutory ones due to capital gains (preferential rates ~20%+3.8%), deductions, carryforwards, charitable contributions, and unrealized gains (which are untaxed until sale, and stepped-up basis at death eliminates much of it). IRS and Treasury data, plus analyses from the Tax Policy Center, CBO, and others, show the top 1% and 0.1% face high average federal tax rates overall (often 25–35%+ when including all federal taxes), higher than middle quintiles, but lower than peak statutory rates. Billionaires can show very low effective rates in some years via unrealized appreciation (ProPublica/IRS data leaks highlighted this). Globally, OECD countries vary; many Nordic/European nations have higher top rates + VAT/wealth taxes but also broader bases or different social contracts.
•Progressivity: US federal income tax is progressive. The top 1% pay a large share of income taxes (roughly 40%+ of federal income tax revenue). Payroll taxes are regressive above the cap; overall system (including transfers) is progressive. Wealth concentration has risen (top 1% wealth share up significantly since 1980s per Piketty-Saez-Zucman and Fed data), partly from asset appreciation, tech/finance returns, and globalization.
Arguments for Higher Rates on the Wealthy
•Revenue and public goods: Top earners have high ability to pay. Moderate increases (or base-broadening + rate hikes) can fund infrastructure, education, R&D, deficit reduction, or social insurance without broad middle-class hikes. Historical US experience and some European examples show high-earner taxes can raise significant revenue. Carbon/wealth/inheritance taxes are sometimes proposed as complements.
•Inequality and externalities: Extreme concentration can distort politics (campaign finance, lobbying), reduce social mobility, and create zero-sum perceptions. If high incomes partly reflect rents (monopoly, network effects, inherited advantage) rather than pure marginal product, higher taxes correct that. Some studies link lower top rates post-1980s to rising inequality.
•Empirical claims: Countries with higher top rates/more redistribution often have strong growth + high mobility when institutions are good (Nordics). Behavioral elasticities are sometimes estimated as modest for rates below ~50–70% (Saez et al.). Unrealized gains and estate tax gaps are seen as loopholes worth closing for horizontal equity.
Arguments Against (or for Caution)
•Incentives and growth: Labor supply, entrepreneurship, investment, and risk-taking respond to marginal rates. High rates can reduce taxable income via real responses or avoidance (Diamond-Saez optimal tax work acknowledges elasticities; some estimates suggest revenue-maximizing top rates around 50–70% depending on parameters, but with uncertainty). Capital is mobile; high taxes can shift activity offshore or into non-taxed forms. Post-WWII high rates coexisted with growth partly due to unique conditions (catch-up, limited global competition, different base).
•Effective vs. statutory and avoidance: Raising rates without base-broadening often fails (more shelters, deferred comp, corporations, munis). Wealth taxes face valuation, liquidity, flight, and administrative issues (see European repeals). Realization-based systems already tax gains; mark-to-market has volatility/practical problems.
•Who is "wealthy" and incidence: Top rates hit high-income (doctors, lawyers, founders, dual-earners in expensive cities) more than pure idle rich. Corporate/capital taxes partly fall on workers via lower wages/investment (incidence literature). Much wealth is in retirement accounts, homes, or closely held businesses. "Pay their fair share" rhetoric often ignores that top groups already fund disproportionate government.
•Evidence: Tax cuts (e.g., 1980s, 2017 TCJA) showed some growth/revenue feedback but also deficits; sharp hikes can shrink the base. Cross-country: high-tax Europe has strengths but also lower dynamic entrepreneurship in some metrics and higher youth unemployment historically. Mobility and absolute living standards for the bottom matter more to many than Gini coefficients alone. Charitable giving and private innovation can substitute for some government spending.
What Evidence-Based Policy Often Emphasizes
Rather than simply "higher rate," better levers include:
•Broadening the base (limit deductions, preferential rates on capital that aren't justified by double-taxation or inflation).
•Better enforcement, information reporting, and international coordination (OECD BEPS, CRS).
•Taxing economic rents, externalities (carbon), or inheritance more consistently while protecting liquidity for businesses/farms.
•Pairing with spending efficiency and growth policies (skills, competition, housing supply) so the pie grows.
•Considering lifetime or consumption taxes vs. annual income snapshots.
•Empirical elasticities, taxable income responses (ITE), and dynamic scoring from CBO/JCT/Treasury.
Optimal top rates in economic models (Mirrlees, Diamond-Saez, etc.) depend on the social welfare function (how much you value equality vs. efficiency), the Pareto distribution of top incomes, and taxable income elasticity. Reasonable parameters produce a wide range; there is no settled "correct" number. Extreme proposals (70–90%+) often ignore avoidance and second-order effects. Zero or flat taxes ignore public goods and ability-to-pay.
Trade-offs are real: More progressive taxation can buy insurance and public goods at some efficiency cost. The right level is a political choice informed by data on revenue needs, behavioral responses, inequality trends, and institutional quality—not slogans. For specific countries/reforms, look at CBO, Treasury, OECD, IMF Fiscal Monitor, NBER papers, and Tax Foundation/TPC analyses for competing interpretations of the same data. If you have a country, proposed rate, or goal (e.g., revenue target) in mind, more tailored evidence is possible.