Taxing the 1%:

According to this ( Taxing the 1%: Why the top tax rate could be over 80% | vox - Research-based policy analysis and commentary from leading economists), lowering the top tax rate just meant that the top 1%  had more reason to argue for taking a bigger share of the pie without actually causing any relatively better performance of the businesses and economies for which they were responsible.

...while standard economic models assume that pay reflects productivity, there are strong reasons to be sceptical, especially at the top of the income distribution where the actual economic contribution of managers working in complex organisations is particularly difficult to measure. In this scenario, top earners might be able to partly set their own pay by bargaining harder or influencing compensation committees. Naturally, the incentives for such ‘rent-seeking’ are much stronger when top tax rates are low. In this scenario, cuts in top tax rates can still increase top income shares – consistent with the observed trend in Figure 1 – but the increases in top 1% incomes now come at the expense of the remaining 99%. In other words, top rate cuts stimulate rent-seeking at the top but not overall economic growth...


The data seem to support this rent-seeking explanation  (as opposed  to actual increased productivity), since:


For example, countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark. Hence, a substantial fraction of the response of pre-tax top incomes to top tax rates documented in Figure 1 may be due to increased rent-seeking at the top rather than increased productive effort.

Leave a Reply