Mirrlees started with no presumption against high marginal tax rates. Indeed, he has been an adviser to Britain’s Labour Party, which for decades imposed marginal tax rates in excess of 80 percent. But Mirrlees found that the top marginal tax rate should be only about 20 percent; and moreover, it should be about the same 20 percent for everyone. In short, Mirrlees’s work justified what is now known as a “flat tax,” more appropriately called a “flat tax rate.”
Mirrlees wrote, “I must confess that I had expected the rigourous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so.” Indeed.
Mirrlees also proved that the marginal tax rate on the highest-income person should be zero. This is the opposite of the way most noneconomists and most politicians think: marginal tax rates are typically the highest on the highest-income people. Mirrlees’s reasoning is as follows. Imagine that the top tax rate is, say, 40 percent and that the top-earning person makes $500 million in a year before tax. If the government reduced the marginal tax rate to zero for all income over $500 million, it would not lose any revenue because no one was earning more than $500 million. But the individual currently earning $500 million might, because of the increased incentive to earn, decide to work more. He would be better off because he voluntarily chose to do something he did not do before, and the government would be no worse off. The net result is that society, which includes this individual, would be better off.
This is from “James A. Mirrlees” in David R. Henderson, ed., The Concise Encyclopedia of Economics.
Mirrlees died yesterday at age 82.
My other favorite paragraph from the bio is this:
Mirrlees has a refreshing, understated sense of humor. Of his early years in university Mirrlees wrote: “It was regarded as morally dangerous to take philosophy at the beginning of one’s university course.” Reminiscing in 1996 on the advice one of his Cambridge teachers gave him to read Keynes’s 1936 classic, The General Theory of Employment, Interest and Money, Mirrlees commented, “That may not have been the best advice, but it did no great harm, and one day I hope to finish it.”
I don’t know if he finished it. I suspect not.
READER COMMENTS
TMC
Aug 31 2018 at 11:49pm
“now known as a “flat tax,” more appropriately called a “flat tax rate.””
Thanks you for making that distinction. Flat tax sounds like each person pays $12,000, how much the US spends per person. Same with ‘progressive tax’. Flat tax rate sounds progressive to me, the more you make, the more you pay.
Mark Brady
Sep 1 2018 at 11:36pm
“Thus, a tax merely proportionate to individual income would be far from equitable; and this is probably what Smith meant, by declaring it reasonable, that the rich man should contribute to the public expenses, not merely in proportion to the amount of his revenue, but even somewhat more. For my part, I have no hesitation in going further, and saying, that taxation can not be equitable, unless its ratio is progressive.” –Jean-Baptiste Say, A Treatise on Political Economy, 6th American edition (1834), 455.
David Henderson
Sep 2 2018 at 3:19pm
Thanks for the quote. It reminds us that in some important ways we have moved beyond both Smith and Say.
Mark Brady
Sep 2 2018 at 8:32pm
In what ways have “we” moved beyond both Smith and Say?
The passage from Say is about what is equitable. It is therefore not a statement in positive economics but a normative statement about what government policy should be. And on such matters thoughtful economists may disagree.
T Boyle
Sep 4 2018 at 1:09pm
My own argument for lower tax rates on very high incomes – while tongue in cheek – is somewhat different. It is this: high-income individuals contribute large amounts to social welfare with each hour of labor. As individuals, they will establish a tradeoff between work, consumption, family and relationship time, and leisure, that is optimal for them, after tax. To the rest of society, however, there is almost no benefit from the time this person spends on family, relationships, and leisure – and relatively little from their consumption (and this is quite different to the situation we face with a middle-class or working-class person). Socially speaking, we want this person to forgo everything but work because, again, their hour of work contributes so much more to social welfare than other people’s work, and more than other uses of their time. We should provide incentives that bias them away from enjoying other aspects of life, and toward work – and certainly not the reverse.
An economically inaccurate, but easy way to express this is to say that people with high incomes do not have much utility for additional wealth – but the rest of us do, and want them to keep producing more anyway.
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