The Yale Law Journal

April 2002

Why Tax the Rich? Efficiency, Equity, and Progressive Taxation

Reuven S. Avi-Yonah
111 Yale L.J. 1391 (2002)

In Greek mythology, Atlas was a giant who carried the world on his shoulders. In Ayn Rand's 1957 novel Atlas Shrugged, Atlas represents the "prime movers"--the talented few who bear the weight of the world's economy. In the novel, the prime movers go on strike against the oppressive burden of excessive regulation and taxation, leaving the world in disarray and demonstrating how indispensable they are to the rest of us (the "second handers").
Rand wrote in a world in which the top marginal federal income tax rate in the United States was 91% (beginning at taxable income of $400,000). This is an unimaginably high rate by today's standards, when the dominant view in Washington is that a marginal rate of 39.6% (the top rate from 1993 to 2001) is too high. The key turning point in the process of abandoning high marginal tax rates occurred in the presidency of Ronald Reagan. When Reagan became President in 1981, the top marginal federal income tax rate was 70%; when he left office in 1989, the top rate was 28%.
The reduction of marginal tax rates in the Reagan years was driven by a new policy consensus that still persists today. That consensus is that high marginal tax rates on the rich come with an unaffordably high price for the U.S. economy in the form of reduced incentives for the rich to work and to save, and increased incentives to engage in socially wasteful tax planning. And yet 1957, when Rand wrote Atlas Shrugged and the top income tax rate was 91%, falls in the middle of the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost.
Thus, the question of whether high marginal tax rates come with an unaffordably high cost to the U.S. economy remains unsettled. Does Atlas Shrug?, a recent collection of papers written mostly by public finance economists and superbly edited by Joel Slemrod, represents the most recent attempt to answer this question. Unfortunately, no clear-cut answer is forthcoming in the book, and the debate is sure to rage on.
This Review is divided into three Parts. In Part I, I summarize the main findings of Does Atlas Shrug?, emphasizing their contribution to the debate on taxing the rich. In Parts II and III, I discuss a question that is only briefly touched on in the book: Why should the rich be taxed? Part II surveys the existing--and to me incomplete--legal literature on this issue, while Part III begins to outline some tentative alternative answers. In my view, the debate about the economic consequences of taxing the rich has obscured this fundamental normative question, and answering it is essential to assessing the merits and relevance of the findings contained in Slemrod's book.