Taxing Top Earners: A Human Capital Perspective
AbstractAn established view is that the revenue maximizing top tax rate for the US
is approximately 73 percent. We argue that theory and evidence suggest a lower
value. First, theory provides a robust formula where three elasticities determine this top rate. Second, theory and measurement suggest that the two new elasticities in the formula are positive and reduce the revenue maximizing rate. Third, a human capital model is provided that follows the logic of the formula, is consistent with regression evidence on the response of income and tax revenue to changes in the top tax rate and yet features a revenue maximizing top rate well below 73 percent.