ON-Lion Letter

In his bestselling book Capital in the Twenty-First Century, Thomas Piketty calls for higher taxes on upper-income individuals in order to combat inequality.  His suggestions include a tax rate of 80% on income above $5 million or $10 million and a tax rate of 50% or 60% on income above about $200,000.  However, according to an in-depth analysis in July from the Tax Foundation in Washington, D.C., Piketty’s proposals could result in as much as a 15% decrease in wages, an 18% decrease in Gross Domestic Product (GDP), and nearly 5 million fewer jobs, in addition to lower after-tax income for all income groups.

Piketty’s work on inequality has been lavishly praised by some economists but criticized by others.  The Tax Foundation special report, researched and written by fellow Michael Schuyler, estimates the consequences for economic growth if the United States adopted the lofty income-tax rates he recommends as part of his policy prescription.  The Lynde and Harry Bradley Foundation in Milwaukee supports the Tax Foundation.
 
“Mr. Piketty suggests that using the tax code -- specifically, increasing income taxes on the wealthy -- is an effective method of addressing inequality,” Schuyler writes. “However, we’ve found that his proposed increases would be damaging for all income groups, not just the well off.  Our research raises the question:  how much are lower and middle income families willing to sacrifice in order to reduce the incomes of the wealthy?”

If ordinary income were taxed at the top rates of 80% and 55%, according to the report, GDP would decrease by 3.5%, wages would drop 1.6%, capital stock would be 7.4% less, and there would be 2.1 million fewer jobs, after the economy adjusts to the changes. 

If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse.  GDP would plunge 18.1% (a loss of $3 trillion annually in terms of today’s GDP), the capital stock would be 42.3% smaller than otherwise, wages would be 14.6% lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.

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