Abstract: The Laffer curve peaks at the revenue-maximizing top tax rate, where revenue losses from behavioral responses offset revenue gains from a higher tax rate. Prior studies, however, largely overlook the Laffer curve's shape, rely on simplified tax functions, and often omit shifting across business types and tax interactions. We show that modeling distinct tax bases more accurately and incorporating these interactions lowers the revenue-maximizing top tax rate and the associated revenue gains, yielding ``flat'' Laffer curves. Over this flat region, increasing the top tax rate raises relatively little revenue. Instead, increasing the top rate primarily trades growth for progressivity.

Scope and Interpretation:

This paper assesses how incorporating realistic tax detail affects the shape of the long-run, top-rate Laffer curve for ordinary income. Laffer curves are constructed by estimating how tax revenue changes with variations in the top rate while holding other tax rules fixed. Accordingly, this paper's analysis is intentionally narrow so that the results can be readily compared with existing studies. The paper does not provide policy recommendations, and it does not evaluate alternative instruments or broader reform packages aimed at raising federal revenue from high-income households (such as preferential-rate changes, base-broadening, surtaxes, estate and gift taxation, enforcement, or corporate-tax reforms), which may be complementary to top-rate increases.

In our macroeconomic model, raising the top federal statutory tax rate on ordinary income from its current value of 37% initially increases federal revenue, while lowering it reduces federal revenue. The central result is that the federal-revenue response can be modest near the peak (``flat'' Laffer curves) relative to prior approaches to modeling the federal tax system. This implies that large rate changes around the revenue-maximizing rate primarily trade off distributional goals against efficiency costs. In our preferred specification the top tax rates that maximizes both federal revenue and all-government revenue are higher than the current top federal statutory tax rate.

The current top federal statutory tax rate on ordinary income of 37% corresponds to an ``all-in'' (e.g., federal, state, and local) top marginal tax rate of about 50%. In our preferred specification, long-run total federal revenue increases by about 0.5% annually (roughly 0.1% of GDP or $25 billion in 2022) when the top statutory rate is raised to 40%, which corresponds to an all-in top marginal tax rate of approximately 53%. This revenue-maximizing rate (in the federal-revenue sense) lies within the mid-range of existing estimates in the literature.

A main takeaway is that the shape of the federal-revenue Laffer depends on the definition of the relevant federal tax base. Our main contribution is to show that modeling the federal tax base more accurately - especially by accounting for the distinction between ordinary income and preferential income - can substantially change both the revenue-maximizing top tax rate and the shape of the curve around it. More broadly, federal tax reforms that change the tax base can change the Laffer curve itself, and therefore the revenue consequences of changing the top ordinary-income rate.