According research by Nobel Prize-winning economist Peter Diamond and Emmanuel Saez, the optimal top income tax rate for wealthy earners is about 70 percent, far below today’s top rate of 35 percent. Diamond and Saez argue that the top tax rate should be set at the point where it maximizes revenue, which can then be used to aid lower-income Americans. They also note that “even increasing the average federal income tax rate of the top percentile to 43.5 percent, which would be sufficient to raise revenue by 3 percentage points of GDP, would still leave the after-tax income share of the top percentile more than twice as high as in 1970.” (HT: Americablog)
For how long can we afford to ignore these pesky Nobel Prize winners? You know, like Paul Krugman.