The case for lowering the top tax rate

August 9th, 2011 at 8:38 am by David Farrar

Richard McGrath blogs at Not PC on how if you want the rich to pay more tax, you should tax them less. Recall that only half of our 100 wealthiest New Zealanders pay the top tax rate. Under the Goofynomics plan to have the top tax rate at 39% and the corporate rate at 28%, I’d say the number paying the top tax rate would drop to under 1/4.

McGrath quotes Keynes:

“[T]axation may be so high as to defeat its object, [and] a reduction of taxation will run a better chance than an increase of balancing the budget.”

And then he goes on to give some examples:

  • UK, 1979: Chancellor Geoffrey Howe cuts marginal tax rate from 83% (!) to 60%. Before the cuts, the top 1% of taxpayers were paying 11% of total income tax received. Nine years later, despite the hefty cuts, they were paying 14% of total income tax.
  • UK, 1980s: Chancellor Nigel Lawson cuts marginal rate further, to 40%. By 1997, the top 1% of taxpayers are paying 21% of income tax received. Thus halving the marginal tax rate doubled the income tax receipts from the wealthiest 1%.
  • US, 1920s: Presidents Coolidge and Harding reduced the top tax rate from 73% to 25%. The share of tax paid by earners making over $100,000 nearly doubled between 1921 and 1925, from 28% to 51%.
  • US, 1961: The top tax rate under Eisenhower had crept up to a staggering 91%. The Democrats supported by Kennedy dropped this to 70%. He stated, a few months before a sniper removed the occipital lobes of his cerebral hemispheres: “[T]ax rates are too high today and tax revenues are too low, and the soundest way to riase revenues in the long run is to cut the tax rates…” As a result of the Kennedy tax cuts, those earning over $50,000 increased the amount of tax paid by 40%, and paid 15% of income tax received in 1966, as opposed to 12% in 1963. Total income tax received went up from $69b in 1964 to $96b in 1968.
  • US, 1981: Under President Reagan, Congress reduced the top tax rate from 70% to 50%. Between 1981 and 1988 the top 1% of tax earners increased their share of tax received from 18 to 28%, while the bottom 50% of taxpayers decreased their contribution to income tax received from 7.5% to 5.7% over this same period.
  • Canada, 1990: Top federal tax rate cut from 45% to 29%; share of tax paid by top 10% of taxpayers increases from 29% to 45%.

Goff should know this. He was one of those who voted to lower the top tax rate to 33% in the 1980s.

If you spend all your after tax income, then those on the top tax rate already pay 43% of their income in tax, when you include GST. We’ll leave ACC out of this for now. I think that’s more than enough.

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