Taxing the Rich Won’t Fix the Government’s Budget Failures

New York City Mayor Zohran Mamdani is pushing for higher taxes on wealthy New Yorkers to fill a budget deficit of over $12 billion. A similar “tax the rich” approach is also gaining momentum in California, where advocates are advancing a 5 percent wealth tax on billionaires via a proposed ballot initiative to address a $19 billion budget shortfall. This approach seems intuitive: raise taxes on the rich, collect substantial revenue, and ease fiscal pressures without broader reforms. However, when budgets are heavily dependent on a small share of high earners who can easily alter their economic behaviors, these policies tend to bring in far less revenue than expected and fail to address the underlying spending problems. 

In both New York City and California, the popular political narrative is that taxing the rich is the clear solution to fiscal troubles. Supporters argue these tax hikes can stabilize budgets without affecting most residents, but this is not a sound approach. When governments treat tax increases as a substitute for fiscal responsibility, they delay the structural reforms needed to ensure long-term budget sustainability.  

New economic research further cautions against this approach. Economists at the nonpartisan Joint Committee on Taxation recently published a paper which challenges the common notion that tax hikes reliably generate large amounts of revenue. While policymakers often treat higher taxes as a straightforward tool for raising funds, the analysis finds the relationship between tax rates and revenue is much weaker than commonly assumed once real-world behavior is accounted for. 

This paper reconfirms what economists have been describing for decades through the Laffer curve. The economic theory argues tax increases don’t inherently translate into higher revenue. Past a certain point, higher tax rates produce diminishing returns or outright reduce revenue because the tax base shrinks or shifts. As the research paper suggests, the curve for top earners is flat: even at the revenue-maximizing top federal income tax rate, additional revenue amounts to only about 0.1 percent of GDP. This means that even significant tax increases can produce minimal revenue gains.  

In other words, when taxes rise, the economically literate alter their behaviors to ensure their continued financial success. Changes in work incentives, income shifting, investment decisions, tax planning, and the location of economic activity all limit the revenue potential of higher top tax rates. 

This dynamic is clearly exemplified in states with higher taxes like California and New York. When state leaders raise taxes or propose new wealth taxes, they may find that the projected payoff is offset by migration and changes in economic behavior. Oftentimes, residents move to states with superior tax environments. California’s population trends underscore this point as the state had led the nation in net out-migration for six consecutive years. Similarly, New York has experienced a net outflow of over 1 million residents since 2020 and is expected to undergo further population decline in the coming years. Mamdani’s proposed tax hikes will surely exacerbate this troubling trend. 

Wealthy residents targeted by tax increases who have the financial flexibility to move are often the lucky ones. When revenue from taxing the upper class is below expectations, lawmakers may shift the burden to less wealthy taxpayers. Beyond revenue shortfalls, tax hikes on high earners can slow investment, discourage entrepreneurship, and push productive economic activity elsewhere, weakening overall economic growth. Over time, this leads to fewer jobs, slower wage growth, and a smaller tax base. In the end, everyone is worse off.  

At the federal level, policymakers are increasingly framing higher taxes on the rich as a tool to address persistent deficits and rising debt. However, if the revenue potential of taxing high earners is more limited than expected, tax increases alone cannot fill the federal budget deficit. As the research suggests, the current federal top income tax rate is already near the revenue-maximizing range. Relying on unrealistic revenue assumptions risks obscuring more crucial conversations about spending growth and long-term fiscal sustainability. Fiscal responsibility must be a priority to get the United States out of the $38 trillion of debt the government has so far accrued. 

Overstating the benefits of tax increases may worsen the fiscal outlook by encouraging lawmakers to avoid the necessary structural reforms that will put the budget on a sustainable path. The debate over tax policy must be grounded in reality. Raising taxes on the rich may satisfy political goals, but it is not a panacea for budget deficits at the state or federal level. As states like California and New York consider tax increases this legislative season, policymakers would do well to engage with the growing body of evidence showing that the payoff of raising taxes is often much smaller than expected. Sustainable fiscal policy requires setting realistic budget baselines and directly addressing spending growth, not depending on costly and unreliable tax hikes.  

Nicholas Huff is a policy intern at Americans for Prosperity.