What Would Piketty’s 80% Tax Rate Do to the U.S. Economy?

Richard Borean

Thursday, August 14th, 2014

In his bestseller, Capital in the Twenty-First Century, Thomas Piketty calls for higher taxes on upper-income individuals in order to combat inequality. His suggestions include a tax rate of 80 percent on income above $5 or $10 million and a tax rate of 50 or 60 percent on income above about $200,000. However, according to an in-depth analysis from the nonpartisan Tax Foundation, Piketty’s proposals could result in as much as a 15 percent decrease in wages, an 18 percent decrease in GDP, and nearly 5 million fewer jobs, in addition to lower after-tax income for all income groups.

Piketty’s work on inequality has been lavishly praised by some economists but criticized by others. The aim of this paper, however, is not to comment on whether Piketty’s analysis of inequality is accurate. Instead, it estimates the consequences for economic growth if the United States adopted the lofty income tax rates he recommends as part of his policy prescription.

“Mr. Piketty suggests that using the tax code—specifically, increasing income taxes on the wealthy—is an effective method of addressing inequality,” said Tax Foundation Fellow Michael Schuyler, PhD. “However, we’ve found that his proposed increases would be damaging for all income groups, not just the well off. Our research raises the question: how much are lower and middle income families willing to sacrifice in order to reduce the incomes of the wealthy?”

The study used the Tax Foundation’s Taxes and Growth (TAG) model to estimate the economic and revenue effects of Professor Piketty’s suggested income tax rates if they became law. The report finds that:

  • If ordinary income were taxed at the top rates of 80 and 55 percent, GDP would decrease by 3.5 percent, wages would drop 1.6 percent, capital stock would be 7.4 percent less, and there would be 2.1 million fewer jobs, after the economy adjusts to the changes.
  • If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse. GDP would plunge 18.1 percent (a loss of $3 trillion dollars annually in terms of today’s GDP), the capital stock would be 42.3 percent smaller than otherwise, wages would be 14.6 percent lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.
  • Although Piketty’s proposed income tax increase may appear to target only upper-income taxpayers, all income groups would suffer from the economic fallout. The after-tax incomes of the poor and middle class would drop about 3 percent if the higher rates do not apply to capital gains and dividends and about 17 percent if they do.

Read the full report: What Would Piketty’s 80 Percent Tax Rate Do to the U.S. Economy?