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A tax system must balance among several competing social objectives: 1) raise sufficient revenue to pay for essential government services, 2) limit the disincentive effects of taxation on work and investment, and 3) mitigate inequalities of income and wealth. The first and third goals suggest that rates should be highest on high-income households, i.e., the tax system should be progressive. On the other hand, the taxation of wealthy individuals should not be so high as to discourage them from working and/or to encourage socially-wasteful tax evasion.
Prior to the Ronald Reagan’s tax reforms, the top marginal income tax rate in the United States was around 70 percent. Such punitive rates are likely to create massive distortions and tax avoidance efforts. It was therefore appropriate to bring down tax rates in the 1980s. President George W. Bush’s income tax reductions, however, are much less defensible, because marginal tax rates were already moderate. Moreover, inequality has worsened dramatically in the United States in the last thirty years, with income gains concentrated in the top 10 percent and especially the top 1 percent of the income distribution. Taxation of the wealthy should therefore be bumped up on equity grounds but not all the way back to pre-Reagan levels.
Professor of Economics at Swarthmore College, Stephen Golub
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