In that case, then again, why will we care how exhausting the wealthy paintings? If a wealthy guy works an additional hour, including $1000 to the economic system, however will get paid $1000 for his efforts, the mixed revenue of everybody else doesn’t alternate, does it? Ah, however it does — as a result of he can pay taxes on that additional $1000. So the social get pleasure from getting high-income people to paintings just a little more difficult is the tax income generated by way of that additional effort — and conversely the price of their running much less is the aid in the taxes they pay.
Or to place it just a little extra succinctly, when taxing the wealthy, all we will have to care about is how a lot income we carry. The optimum tax price on other people with very excessive earning is the price that raises the most conceivable income.
And that’s one thing we will estimate, given proof on how responsive the pre-tax revenue of the rich in reality is to tax charges. As I mentioned, Diamond and Saez put the optimum price at 73 %, Romer at over 80 % — which is in line with what AOC mentioned.
An apart: What if we have in mind the fact that markets aren’t completely aggressive, that there’s so much of monopoly energy available in the market? The solution is this nearly indisputably makes the case for even upper tax charges, since high-income other people possibly get so much of the ones monopoly rents.
So AOC, a long way from appearing her craziness, is absolutely in keeping with critical financial analysis. (I listen that she’s been speaking to a few superb economists.) Her critics, on the different hand, do certainly have loopy coverage concepts — and tax coverage is at the middle of the loopy.
You see, Republicans nearly universally recommend low taxes on the rich, in accordance with the declare that tax cuts at the best may have massive really helpful results on the economic system. This declare rests on analysis by way of … smartly, no one. There isn’t any frame of critical paintings supporting G.O.P. tax concepts, as a result of the proof is overwhelmingly in opposition to the ones concepts.
Look at the historical past of best marginal revenue tax charges (left) as opposed to enlargement in actual GDP consistent with capita (proper, measured over 10 years, to clean out short-run fluctuations.):