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Professor James Mirrlees passed away last month at age 82. The Nobel prize-winning economist was a leading public finance theorist who emphasized the optimal design of tax systems. But unlike many academic economists, Mirrlees had enormous influence on the shape of tax policy--both in the UK and the US.
In the 1970s, the US imposed a top marginal tax rate of 70 percent on the highest earners. Mirrlees challenged conventional wisdom and suggested that very progressive income tax systems with high marginal rates on the highest earners could generate less revenue than an alternative rate schedule with lower top rates. If income reflects the market’s view of productivity, then high marginal tax rates discourage work by the most productive members of society. Lowering marginal rates for the highest income households could encourage them to work more hours or work harder. And those additional earnings would then be taxed.
Mirrlees’ insight began with the observation that an optimally designed income tax would necessarily involve a trade-off between efficiency and equity. The long-time Oxford University professor then noted that by flattening tax rates at the top of the income distribution, the government potentially could raise more taxes from top earners and redistribute that revenue to lower-income people, increasing the overall well-being of society. Under this alternative rate structure, those with high incomes would pay a relatively high effective tax rate but a relatively low marginal tax rate on their last dollar of earnings.
This finding became the theoretical framework for policymakers who flattened income tax rate schedules in the US and the UK in the 1980s. In the US, the Tax Reform Act of 1986 cut the marginal income tax rate from 50 percent to 28 percent for the highest earners (who made over about $200,000 in 1988, equal to $426,000 today), a shift consistent with Mirrlees’ theoretical results.
In subsequent decades, Congress has raised marginal tax rates on the labor income of the highest earning households, though they remain well below the levels of the 1970s, when Mirrlees published his results. Perhaps this reflects the observation that high incomes may result from luck or other factors besides productivity. Perhaps it reflects an evolving sense of what constitutes fairness in a tax system.
Still, Mirrlees’ influence remains in the relatively flat income tax rate schedules we see today. And four decades after his path-breaking work, Mirrlees continues to influence academic tax economists. Type “optimal tax” into a search engine and hundreds of papers appear, many authored by the giants in the field.
And Mirrlees’ theoretical work is still being complemented by his efforts at tax reform in the UK. He oversaw a tax reform commission, which published “Taxes by Design” in 2011, a work setting the stage for ongoing policy discussions in the UK.
Mirrlees has the rare distinction of influencing not only the theory of public finance but its policy execution. These achievements set a high aspirational bar for today’s students of public finance.
Farewell, James Mirrlees. The field of public finance is in your debt.
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