Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
I know Boskin is one of my betters, but I am having hard time with this statement. These were the tax rates during the Clinton years, and people seemed to work awfully hard then. I also wonder if it is necessarily the case that our highest paid citizens are in fact our most productive. Given what we now know about the decisions taken by investment bankers, does Boskin really want to argue a strong correlation between productivity and very high pay?
[Update. David Barker in the comments paper points me to an Ed Prescott paper arguing that taxes affect the labor supply. He uses a cross country comparison to do so. But so far as I can tell, his results derive from a simulation model with some assumed parameters about the size of the capital stock across countries and the value of leisure. There are no controls for the relative size of the social safetuy net by country. I can't find a standard error in the paper, so it is hard to know what the results really mean. I certainty don't see firm evidence supporting Boskin's quadratic rule.]