The increases in marginal tax rates imposed by the Clinton administration and Congress are likely to raise little or no additional revenue. Instead, the high-income people subject to the higher rates will reduce the amount they work, take more of their pay in fringe benefits rather than in taxable income, increase their deductions and invest their income in tax-free municipal bonds rather than taxable bonds. All of these measures will reduce taxable income, and thus the expected revenue will not be forthcoming.

How do we know this? Because when the top marginal tax rate was cut, going from 50 percent in 1986 to 28 percent in 1988, high-income people did the opposite. As a result, the taxable income of people who were in the 49 percent and 50 percent marginal tax brackets in 1985 rose by 20 percent relative to overall income growth for the economy.

If high-income people did not change any of their behavior, then the tax rate increases of 1993 would generate additional tax revenue of $25.8 billion. But taxpayers will respond to the disincentives in the law. Economists have used computer simulations to estimate that:

• A couple whose taxable income would have been $180,000 will respond in ways that reduce it by 12 percent.

• If that happens, instead of paying $3,305 more in taxes, the couple will pay about $4,864 less.

• A couple whose taxable income would have been $500,000 will respond in ways that will almost wipe out any additional taxes.

• The couple's tax bill will increase by only about $1,460 rather than the $37,585 of additional taxes they would have paid if they had not changed their behavior.

• Overall, the tax increase will generate at most only $3.4 billion in revenue rather than the $25.8 billion. - David R. Henderson.

Source: Martin Feldstein, "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," NBER Working Paper No. 4496, October 1993, National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, (617) 868-3900.

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