On July 10, 2012 Paul Krugman, economist and columninst at The New York Times writes:
There is no question that incentives matter, that other things equal, someone facing a high marginal tax rate will work less than he or she would otherwise. How much they matter is another issue; in fact, careful empirical study suggests that they matter far less than right-wing mythology would have it.
But there’s a further point: if you care about incentives, you should care about everyone’s incentives. The top 0.01 percent may like to imagine that it is the engine of the economy, but there is no good reason to believe that there is anything special about their role other than the fact that they make lots of money. Or to be a bit more specific, there is no reason to believe that there is a larger gap between the social marginal product of super-elite earners and their pay than there is for anyone else. (If anything, given the prominence of dubious financial activities in the top .01’s income, the presumption goes the other way). So if you’re worried about the effect of marginal tax rates on work incentives, you should worry about that effect at all income levels.
And here’s the thing: it’s actually a well-documented fact that effective marginal rates are highest, not on the superrich, but on workers toward the lower end of the scale. Why? Partly because of the payroll tax, but largely because of means-tested benefits that fade out as your income rises. Here’s a recent discussion by Eugene Steuerle (pdf), with this figure included:
