A new research paper suggests the federal income tax rate that brings in the most total government revenue might be 39 percent—nearly identical to today's 37 percent top rate and far below earlier estimates. Economists Rachel Moore, Brandon Pecoraro, and David Splinter argue that previous studies overestimated how much money higher tax rates could generate because they didn't fully account for how taxpayers shift income between different parts of the tax code. The finding challenges a widely cited 2011 paper that put the revenue-maximizing rate much higher.
The authors found that when accounting for all behavioral responses and multiple tax bases, the federal income tax rate that maximizes federal revenue alone sits at 48 percent, which would generate an extra $43 billion annually, or 0.2 percent of GDP. But when state and local taxes are included in the calculation, the optimal top federal rate drops to 39 percent, yielding just $1 billion in additional total tax revenue because losses to state and local collections nearly cancel out federal gains. By contrast, an influential 2011 study by economists Peter Diamond and Emmanuel Saez estimated the revenue-maximizing rate at 73 percent for all taxes combined, though that figure assumed a broader tax base than currently exists—their estimate fell to 54 percent using the actual tax system at the time, or 48 percent for the federal rate alone.
The new paper shows that revenue losses from federal rate increases roughly double compared to earlier estimates when researchers use multiple tax bases instead of one. The authors explain that a large portion of income at the top falls outside the ordinary income tax base—long-term capital gains and qualified dividends face lower rates, while deductions and credits for various investments further shrink what's actually taxed. According to the researchers, the Laffer curves are flatter than previous studies suggested, meaning the revenue gains from lifting top tax rates are smaller than policymakers might expect.
The report emphasizes that taxpayers respond to rate changes along multiple margins that earlier models missed. Corporations might switch from corporate to pass-through structures if tax rates on pass-through business income drop, while individuals may boost tax-deductible activities like charitable donations when their rates climb. These behavioral shifts matter because they determine how much taxable income actually remains when rates go up. The authors conclude that raising top income tax rates on the current tax base may not deliver as much revenue as previously thought, due to opportunities to move income to different tax bases within the code. Policymakers should consider this reality when weighing higher taxes on top earners without broader reforms to how the tax system is structured.