The Moral Imperative For The Continuation Of Low Tax Rates For The Top Income Fractiles

Reports indicate that one of the reasons the “grand bargain” failed was the refusal of one party to accede to an increase in tax rates on households with AGI above $250,000. [1].

I can understand this reluctance, given that the share of total income going to the top 5% of households fell from 38.7% to 36.5%, going from 2007 to 2008 (just ignore the increase of 17.6 percentage points in the previous 30 years).

Below is an updated graph from our forthcoming book Lost Decades by myself and Jeffry Frieden, illustrating the grievous harm that these households have endured.


Figure 1: Pretax income shares (including realised capital gains) accruing to top 5% of households (blue line) and to top 1% (red line). Source: updated version of Piketty and Saez (2007).

In 2008, the threshold income for the top 5% was $152,726. The top 1% of households (with a threshold income of $368,238) also suffered a decline in their income share, which fell from 23.5% to 21%. This was in contrast to previous experience. From Lost Decades:

    Over the course of the Bush expansion, two-thirds of the country’s income growth went to the top 1 per cent of the population. These very rich families … saw their incomes rise by more than 60 per cent between 2002 and 2007, while the income of the rest of the nation’s families rose by 6 per cent.

Hence, I can see why individuals in these households, failing to see continued growth in their income share, would want to maintain the low tax rates they have become accustomed to. The rates being levied at the top of the income distribution are illustrated below.


This post originally appeared at Econbrowser.

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