The 100% Tax in Theory and Practice


Taxes often discourage work effort. Is this a necessary but unfortunate byproduct of policies intended to redistribute from rich to poor? Or is discouraging work effort the primary goal of policy? I examine the case of 100 percent labor income tax rates and argue that 100% tax rates have some of the expected disincentive effects and hence that their prevalent use is inconsistent with the goal of redistributing from rich to poor. I then introduce a model where the primary policy goal is to discourage taxable income and show how 100 percent taxes are optimal over a relatively wide range of incomes, arguing that discouraging taxable income as a primary policy goal provides a better description of policies actually used -- especially policies with respect to the elderly. Such a goal may also explain high but less-than-confiscatory tax rates, minimum wage laws, maximum hours laws, and the world-wide lack of means testing of social security programs.

© copyright 1998 by Casey B. Mulligan.