Why Tax the Rich?

A question that has been central in this electoral season is whether taxation of the wealthy matters. Republicans suggest that it reduces growth, since it creates negative incentives to 'job-creators', while Democrats argue that it is a question of fairness. The figure shows some data which sheds light on the second issue.

The graph shows the top marginal rate from 1913 to 2010 in the left-hand axis, with a low of 7% in 1913 and an all time high in 1953 at 92% of the marginal dollar being taxed, and the income of the top 1% (the non-99%) on the right-hand side. The lowest level of total income of the top 1% was 7.7% in 1973 and the highest levels were 19.6% in 1928 (right before the 1929 crash) and 18.3% in 2007 (before the 2008 Lehman collapse). There is a clear negative correlation. And, by the way, it is no coincidence that after the increase in inequality we had a financial crash both times.