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One of the backbone philosophies of the recent Labour party campaign was higher taxation of high earners (those earning above £80'000 per year to be precise).

Has very high taxation of high earners ever worked or been effective as an economic policy?

Historically and in other countries, have such high tax rates worked well and been a lasting policy which has helped a country pay for public services? What would be the repercussions of very high tax rates on high earners?

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    "Rich" is about wealth, and "High earners" is about income. Are you asking about income tax, or wealth tax?
    – Sjoerd
    Jun 9, 2017 at 19:39
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    How high tax do you want? How well does it have to work? Mao slaughtered the rich but China became arguably better equipped for the world market than when he started. The US tried a (then) outrageous income tax (3%) to pay for our civil war, which seems to have worked out ok.
    – user9389
    Jun 9, 2017 at 19:45
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    The only decent example of taxation on the "rich" I can think of which is a stable and non-stagnating system is Nordic system (Sweden and Denmark - excluding oil rich Norway), and even there the taxes on the "rich" are "only" as high as 50-60%. Whether it "works" or not is your subjective choice (and even more subjective, speculation if it will spectactularly fail now that Sweden made a choice to turn into welfare capital for non-heterogeneous population, which is a recipe for economic issues down the road as France found out).
    – user4012
    Jun 9, 2017 at 20:01
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    @Relaxed: Fair question, but the Swiss banks did quite well for many, many years thanks to the fiscal policies of their neighbours. And Monaco's success at attracting millionaires is similarly explained. Corbyn is suffering a bit from an insular mentality, when he's assuming the main tax payers will stick around.
    – MSalters
    Jun 9, 2017 at 22:12
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    Has high taxation of the rich ever worked? Worked for whom. What is the definition of worked (was implemented and survived for 1 year, improved the economy of the country, helped poor)? What would be the repercussions of very high tax rates on high earners? for starters they might realize that there are countries where they can pay less taxes and live better. Another thing they can realize how to evade paying taxes in legal/illegal way. Jun 9, 2017 at 22:24

6 Answers 6

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Yes, of course.

Most European countries, especially Nordic ones, have high tax rates for high income, and it works perfectly.

What are the repercussions of very high tax rates on high earners? Almost none. Although many get public tantrum on every tax increase and declare immediately going abroad, they generally stay and pay that taxes. Poor countries (like Eastern Europe) might have lower taxes, but the income is also low, so emigrating there means that your living standard would degrade in spite of lower taxes. There are single exceptions like Gerard Depardieu, but for most people changing citizenship simply won't work. You can't have rabbit and eat rabbit at the same time.

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    It "works well" in countries like the nordic countries because they have a population about the size of the state of Massachusetts and most individual incomes are all relatively high. There is not a great deal of poverty or social diversity to deal with. In other words, you could implement just about any tax policy and it would appear to work well.
    – Dan
    Jun 10, 2017 at 3:19
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    "There is not a great deal of poverty". Do you think this could be a consequence of their progressive tax policy? Jun 10, 2017 at 5:34
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    "population about the size of the state of Massachusets" is a flawed variation of the homogeneity argument which is discarded by the very/more diverse examples of France, England, Denmark, Holland, Belgium Jun 10, 2017 at 5:55
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    @Charlie: This makes no sense at all. In what way is an unemployment rate of 6.9% a less serious problem than one of 4.8%? Also, Sweden has taken in many more refugees than the UK, as a percentage of its population: oecd.org/els/mig/keystat.htm Jun 22, 2017 at 8:14
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    This answer doesn’t have any hard numbers such as saying a certain country had a tax rate at X percent for Y years, and uses the word “tantrum”. Jan 22, 2019 at 10:05
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The history of the USA is not devoid of high income tax marginal rates.

During both World Wars, during the Great Depression (and even before Roosevelt's New Deal, btw) and until Reagan's tax reform in the 1980's, the rate of inflation-ajusted top bracket of earners was well above 60%, culminating at 94% after the Individual Income Tax Act of 1944.

Without a counterfactual, whether it 'worked' or not can be debated for ages by economists and politicians, however the US economy sustained huge war efforts, overcame the Great Depression and developed the hyper-consumerist society during periods where the tax paid by the highest earners were much higher than today.

Also, the raise of inegalities in the US since the late 1970's correlates with the lower level of taxation on the richest.

The history of income tax marginal rate in the USA from fivethirtyeight:

Top marginal tax rates since 1913

NB: As pointed out in comments, the marginal tax rate is not equal to the average tax rate paid by a high-income taxpayer, since it only applies to highest bracket of his income. @Trilarion provides this nice link for both marginal and average tax rates through since 1900 in the US. @user189035 provides the study(pdf) from which the graphics are built.

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  • Can the downvoter please explain how I should improve this answer ?
    – Evargalo
    Jan 3, 2019 at 15:13
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    I'm not the downvoter but marginal tax != effective tax. Eisenhower never paid 90+% taxes. ' In 1952, for example, when the top rate was 92%, the highest-earning 1% of taxpayers had an average rate of 32%, according to Elliot Brownlee, a tax historian and emeritus professor at the University of California' gated wsj link
    – user189035
    Jan 21, 2019 at 14:09
  • @user189035 Marginal tax can be close to effective tax, that is if the overall income is way above the highest tax bracket. If one can get effective tax rates for the top 1% or top 0.1% earners over the course of history I would like to see them too.
    – Trilarion
    Jan 21, 2019 at 14:13
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    This link seems to confirm that average tax on top 0.01% earners may have been as high as 60% in the US, the motherland of capitalism, shortly after world war II and still in the 80s may have been twice as high as today. One may even be tempted to add a graph showing the economic growth during that time.
    – Trilarion
    Jan 21, 2019 at 14:26
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    @Trilarion: thanks. This is super informative. The paper behind the plot on the link you gave is Hungerford, Thomas L. “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.” Congressional Research Service, Report no. R42729. September 12, 2012. fas.org/sgp/crs/misc/R42729.pdf.
    – user189035
    Jan 21, 2019 at 18:09
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Defining terms

Has very high taxation of high earners ever worked or been effective as an economic policy?

What do you mean by worked?

If the question is, are there countries with progressive tax rates that have less income and wealth inequality than other countries with less progressive tax rates, then yes, they've worked.

If the question is, are there countries that have successfully used progressive tax rates to decrease the taxation of the middle class, then no, they don't work. If you compare the United States, with a relatively low top rate to countries with higher top rates (including the US prior to 1980), the US gets more of its revenue from high income earners.

Denmark

As an example, let's compare the US and Denmark. Denmark has a higher top marginal income tax rate and lower income inequality than the US.

Top marginal income tax rate (combined federal and local):

  • US: 47.6% in California; 39.6% in states without an income tax (e.g. Washington).
  • Denmark: 60.2%, starting around $55,000.

Income inequality (2012 Gini coefficient):

  • US: 32nd highest at 46.1.
  • Denmark: 140th at 29.1.

We can easily see that Denmark has much higher taxation on high earners and lower income inequality. But it also has much higher taxation on moderate earners. That 60.2% maximum rate kicks in around $55,000, not much above the median household income. So in Denmark, everyone with above average income pays the same tax rate.

In the US, the rate is lower and it applies to fewer families. Only those making more than $400,000 a year pay the top rate. And a far higher portion of the overall tax burden is paid by high earners. The top 1% of earners pay almost 40% of federal income taxes (from the Tax Foundation).

Denmark also has a 25% VAT (value-added tax). Compare that to a top sales tax of 9.75% in California (combined state and local). And the sales tax is an exclusive tax, so it would be only 9% on an inclusive basis (matching the 25% VAT). Meanwhile, the VAT is an inclusive tax, so it would be 33% on an exclusive basis (matching the 9.75% sales tax). And VAT aren't progressive at all.

People who make even the lowest salaries in Denmark have to pay VAT. Let's assume that they consume their entire income, with no savings. So even if they pay no income tax, they still pay 25% tax.

In the US, someone making up to $19,725 only pays a 10% federal income tax (and that only on $9,325 of that income). So if we assume a 9% California sales tax on an inclusive basis (to match the 25% VAT), that still leaves 6% to pay local income taxes. That would be a rather high rate. We'll assume that the Earned Income Tax Credit (EITC) offsets any Social Security taxes.

Overall, the tax exclusion saves about $1000 in the US compared to Denmark. So the working poor pay less tax in the US (and also receive fewer benefits).

So overall, Denmark has higher but less progressive taxes than the United States. They would charge high earners at a high rate, but they have very few high earners to charge. So they charge lower earners at a higher rate than the US does. This is true even at the poorest levels, but is especially true between incomes of $55,000 (where the highest Danish rate starts) and $400,000 (above which the highest American rate starts).

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  • This is an interesting comparison between the taxation systems of the US and Denmark, but how does it answer the question "Has high taxation of the rich ever been sustainable as an economic policy"? All this answer tells me about this question is "Denmark doesn't do that".
    – Philipp
    Jun 22, 2017 at 8:07
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    @Philipp But Denmark does do high taxation of the rich (if they can find any), as noted here. What they don't do is low taxation of the not rich.
    – Brythan
    Jun 22, 2017 at 15:45
  • But, and this is a big but, in Denmark medical treatment and education are free and housing for the lower end is subsidized and all this should be worked in the calculation. Jan 4, 2019 at 16:29
  • @JonathanRosenne Why should it? Your country can have that stuff too, at the cost of high taxes.
    – user253751
    Aug 11, 2021 at 11:45
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To complete the other answers. There are some countries, including the US, where the argument "rich people go away" would not work at all, since rich people pay taxes wherever they are. See this http://time.com/money/4298634/expat-expatriate-taxes-us-myths/

Of course, it doesn't apply if fraud is easier abroad. But most countries collaborate with the US on this.

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    Gerard Depardieu left France as a consequence of high taxes. Hedge Fund billionairs all left New York state for Connecticut when hedge fund taxes were raised in New York. Your premise is proven false by reality
    – user4012
    Jun 10, 2017 at 4:29
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    @user4012 it is not the case in France (although some people want it), and does not apply to inter - state differences. It is only true for rich individuals abroad. If Depardieu were american, going to another country would not change his taxes much. Jun 10, 2017 at 8:54
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    Everything should be calculated over the grand scheme as well. Its not impossible that taxes collected after the changes described to still be higher than before, even though the tax-payers base shrank. Flight of capital and lost tax revenue may be smaller than the gains from the remaining tax payer population. See the example of California about a state actually raising taxes yet getting positive cash flow due to the change.
    – Leon
    Jan 22, 2019 at 13:37
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Difficult to say. High taxation does really apply to the rich or will they be able to escape it anyway? I saw an answer mentioning nordic countries, but I also remember reading about the founder of Ikea taking residence in Switzerland or the heir of the Heineken family being resident in London.

Probably it would be more useful to discuss a fair taxation, but with less loopholes allowing avoidance.

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former answers on your question are very good, I would just add that the fact about corruption is missing, rich people finance polticiians and their political parties, therefore, some politicians protect the interest of riches and demand lower taxes for the richest. so, financing political party is very expensive, especially in big countries like France and Germany, Macron took the money from Rotchild and make the law as Rotchild needs it: worse labor law for workers and better for riches, lower taxes for riches, etc. when you take money from the rich, you must jump as they say. and I am sure, Macron needs 20M eur per year, maybe even per month, for his political party. nobody gives you 20M if you don't do something for him.

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  • This is an explanation of why high taxation of the rich is rarely implemented, but it doesn't actually answer the question of whether it's sustainable in its own right.
    – F1Krazy
    Jan 23, 2019 at 12:04
  • @F1Krazy sorry I missed one more sentence: because rich people finance politicians, it is logical that politicians will do everything to protect the interest of riches, it means it is not sustainable. it is visible from my standpoint, but if I need to write it, here it is: it is not sustainable and it is not effective as economic policy because of corruption. Jan 23, 2019 at 12:14
  • @travolta2019, if you have to clarify your answer, don't do it in a comment; it may be better to edit your post and enter the relevant information there.
    – bytebuster
    Jan 23, 2019 at 15:43

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