(Bloomberg News) Atlas won't shrug.
That's the view of economists Emmanuel Saez and Thomas Picketty: They argue higher taxes will not discourage the wealthy from working harder or slow the economy, unlike in Ayn Rand's 1957 novel, "Atlas Shrugged." Its hero, John Galt, led a strike by industrialists and others against the government, partly because they thought they were too highly taxed.
"Top 1 percent earners now make 20 times the average, while they made only 10 times the average in the 1970s," Saez, winner of the John Bates Clark young economist award in 2009, said in an e-mail. "If they worked hard then, they should continue working hard today, even if they are taxed at 50 percent." The top federal tax rate is now 35 percent.
The two economists' work is of more than just academic interest. President Barack Obama's former budget director, Peter Orszag, has said their research on income inequality "helped to point the way for the administration in its pledge to rebalance the tax code." Senate Republicans last month blocked Obama's plan to raise taxes on the rich via the so-called Buffett rule, arguing it would hurt the economy.
"High marginal tax rates distort decisions to work, save, invest and start a business," Glenn Hubbard, an economic adviser to Republican presidential candidate Mitt Romney, said in an e-mail.
In France, Socialist presidential candidate Francois Hollande has called for a 75 percent tax on annual incomes of more than 1 million euros ($1.3 million), a proposal championed by Picketty, a professor at the Paris School of Economics. Polls show Hollande leading over incumbent President Nicolas Sarkozy in advance of May 6 elections.
"The idea that we need to pay people many millions of euros per year to get them to work harder is just crazy," Picketty said in a telephone interview.
He and Saez, a professor of economics at the University of California-Berkeley, agreed in a November 2011 paper that the rich do behave differently when their taxes are raised. They pursue financial strategies to reduce their taxable incomes and bargain for higher compensation, instead of cutting back on how much they work and save or becoming less entrepreneurial.
Peter Diamond, who won the 2010 Nobel Prize in economics, also sees little evidence that raising rates on the top 1 percent of income earners -- households making about $350,000 or more a year in 2010 -- would restrict growth.
"The overwhelming likelihood is that the revenue- maximizing federal tax rate is somewhere in the 50 to 70 percent range," said Diamond, a professor at the Massachusetts Institute of Technology in Cambridge. "If you are reluctant to overshoot, well okay, you can only go up to 50 percent, which I like to refer to as the Reagan tax rate."