Bruce Bartlett: Would a Higher Top Tax Rate Raise Revenues? On Friday, Prof. Allan Meltzer of Carnegie Mellon University, a well-known conservative economist, offered a commentary in The Wall Street Journal arguing against policies to equalize the distribution of income. His key piece of evidence is the chart below, from a study by the Swedish economists Jesper Roine and Daniel Waldenstrom, that shows the share of income accruing to the top 1 percent of earners in seven Western democracies. They all follow the same trend line, Professor Meltzer says, and it proves that "domestic policy can't be the principal reason for the current spread between high earners and others." Leaving aside the fact that the ultrarich have gained far more in the United States than any other country in his sample and that there is no upward trend at all in the Netherlands, he seems to have missed an important implication of his own conclusion. If the rich are going to continue to get richer in low-tax countries and high-tax countries alike, then it must mean that high tax rates have far less of a disincentive effect on the rich than conservatives like Professor Meltzer continually proclaim. He asserts that we should not raise tax rates on the wealthy, as President Obama has proposed, because it won't do anything to reduce the share of income going to the ultrawealthy and thereby equalize the distribution of income. For the sake of argument, I will concede the point. But there is another very good reason to raise taxes on the ultrawealthy: the government needs the revenue. Although conservatives routinely deny that tax cuts have anything to do with budget deficits, the slightest bit of common sense says otherwise. According to the Congressional Budget Office, federal revenues will consume just 16.3 percent of gross domestic product this year. The postwar average is about 18.5 percent. The reason they are so much lower is because the huge tax cuts of the George W. Bush administration were extended by President Obama in 2010, along with an additional cut in the payroll tax that replaced an earlier Obama tax cut called the Making Work Pay credit. Without all these tax cuts, revenues would be about 2 percent of gross domestic product higher, according to the C.B.O. Only in some fantasy world would it be possible to balance the budget without higher revenues. In the real world, it is impossible to balance the budget with revenues at 16.4 percent of G.D.P. Therefore, taxes will have to rise. The only question is who will pay more? Everyone, I think, but the wealthy will have to pay a lot more, because they have a much greater capacity to do so than most Americans. If they don't pay more, then the rest of us will have to bear a higher tax burden or suffer having programs like Medicare, which almost everyone will benefit from eventually, decimated. Republicans, however, are quite adamant that not only must the wealthy not pay any more in taxes - but, in fact, must have their taxes further reduced. Every Republican presidential candidate favors lower taxes on the wealthy. Mitt Romney, for example, has proposed cutting the top income tax rate to 28 percent from 35 percent. While Republicans differ on how much taxes on the rich should be cut, they are united in their belief that under no circumstances should their taxes be increased, even though Republicans themselves wrote the law that would have raised taxes on the rich beginning on Jan. 1, 2011, absent the last-minute temporary extension of the Bush tax cuts to which President Obama agreed. The top rate is now scheduled to rise to 39.6 percent on Jan. 1, 2013. A common reason given by conservatives for why tax rates must not be increased is that the government won't get much, if any, additional revenue and might even get less due to the Laffer curve. If tax rates are too high, they say, the rich will stop working and investing in job-creating businesses and instead spend all their time vacationing and seeking out tax shelters. Therefore, revenues will fall. However, one never sees conservatives cite any empirical evidence in support of their contention. It is simply asserted as self-evident that the rich will go on strike, as they did in Ayn Rand's famous novel, "Atlas Shrugged," even though the nation clearly did quite well during times when the top income tax rate was far higher than it is now. The reason for the conservative reluctance to estimate the revenue-maximizing top tax rate is that academic research generally shows that it is much, much higher than the current top rate or any that has been proposed by the Obama administration. The two latest studies are these: A National Bureau of Economic Research working paper published in November by Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva found virtually no supply-side effect from cuts in the top tax rate since 1975. That is, there was no significant increase in output resulting from them; hence there would be little negative output effect from raising the top rate. Consequently, the revenue-maximizing top rate may be as high as 83 percent, they estimate. A National Bureau of Economic Research working paper published last month by Christina Romer and David Romer estimates that the revenue-maximizing rate is 84 percent. Even assuming a higher response by the wealthy to earning income - something economists call elasticity - than the Romers believe is likely, the top rate could still rise to 73 percent before a Laffer curve effect set in. No one is suggesting that the United States go back to the top rate of 50 percent that prevailed during most of Ronald Reagan's administration, let alone the 91 percent rate of Dwight Eisenhower's. But it's clear that there is going to be continuing pressure to raise rates on the wealthy as long as the budget deficit remains a problem. If, as Professor Meltzer has shown, the rich get richer regardless of the tax rates, there is no economic reason not to raise the top rate. Perhaps unwittingly, his research confirms that of other economists who say that we could get substantial additional revenues even if the top rate doubled.