Laffer Curve

[mileslunn]

It absolutely exists and most agree on its existence.  The controversy is where its peak is located.  Most on the left argue it's peak is much higher than where taxes are today while many on the right argue its lower.  There is also the short term vs. long-term impact.  If the US raised the top tax rate to 60%, they would likely get more income in the short-term, but long-term due to slower economic growth it might result in less. 

While no consensus it does seem that 45% is a common tax rate or close to that for top marginal so there probably is some reason for that.  Back in the 80s when Canada had tax reform, the top rate was set at 29% federally (It's now 33%) which would mean the average provincial + federal would have been close to 45%.  Likewise in the US, under Clinton and Obama, the top federal rate was 39.6% which if you combine local and state taxes (and the SALT is not used, which most in high brackets probably did use it) it would come to around that.  Looking abroad it is 45% in several countries

Germany (Actually 47.5% due to solidarity surtax which was supposed to be eliminated but hasn't)
UK (47% if you include NI payments)
France (Actually around 54% when you include CSG Payments which are essentially a tax)
Spain (some autonomous communities are higher like Catalonia and Andulusia others like Madrid lower

Italy (It is 43% nationally, but if you include municipal and regional tax it is close to 45%)
Greece (It is closer to 55% with the surcharges but supposedly once the debt is under control those will come off)

South Korea (It is now 44% if you include municipal taxes)
Luxembourg (It is 42%, but 45.8% if you include 9% surcharge)
Australia (47% soon to be 47.5% when you include medicare levy)
Japan (Actually 55.6% if you include prefecture 6% and municipal 4% taxes plus surcharge)

So the fact a lot of countries try to put their top rates close to 45% probably suggests long term the maximizing rate for both growth and revenue is around that.  The IMF even suggests 44% as ideal rate.  And it sort of makes sense, 50% is a psychological barrier in that you are working for the government so acts as a disincentive so 45% is just below that.

If you look at past US tax cuts even there you could suggest the optimal top rate is probably close to 40% federally.  When Kennedy dropped the top rate from 91% to 70%, the impacts were quite positive.  When Reagan dropped it from 70% to 50% also positive while so was dropping from 50% to 28%, however when George HW Bush raised it to 31% and Clinton to 39.6% the negative impacts many on the right warned would happen never materialized and in fact the economy grew.  Likewise George W. Bush tax cuts to 35% provided little benefit and Obama raising it back to 39.6% did little harm and with the economy humming along well, its unlikely Trump tax cuts to 37% will benefit much.  Now it may harm some states due to changes to the SALT (state and local tax deductions) as top rates will rise in high tax states like California (47.6% before at 39.6% with SALF to 50.3% at 37% without SALT).

So in sum, it exists the question is where it should be.  Also the short-term peak is higher than the long-term peak as its not just about the rich working less or moving elsewhere, it also has to take into impact economic growth.  In addition the complexity of the tax code matters since if it is full of loopholes and deductions, those with money are more likely to aggressively use those to lower their tax burden if the rate is high whereas if low many will find hiring an accountant or spending more time doing their taxes to find every deduction a waste of time and money.  Here in Canada when Trudeau raised the top rate, many CEOs switched from salaries to stock options as stock options are only taxed at 50% of the regular rate (If top rate is 53.5%, then stock option is 26.75%) thus reducing government revenue there.

[mileslunn]

Also rates relative to others and ability of capital to move matters.  Part of the reason the US could have top rates over 70% in the past is all developed countries had similarily high rates, but when France tried to introduce the 75% millionaire's tax under Francois Hollande many just packed up in left.  If you have a metro area that crosses state lines, that is when having a higher rate on one side can have a negative impact.  For example, many wealthy who work in the Portland area live on the Washington state side where there is no state income tax vs. Oregon which has the third highest rate of 9.9%.  So within a country that is when there is the greatest danger if rates are uncompetitive.

Next is a common market that allows free mobility of labour.  Having uncompetitive rates within the EU where one can freely live and work in another country is more damaging than say in NAFTA where there isn't free mobility of labour.  There is also language and cultural barriers.  Since English is a widely spoken second language, an English speaking country couldn't get away with the high rates Japan could as outside Japan no one speaks Japanese and in Japan knowledge of a second language is low thus why they can get away with a 55.6% rate which say Canada and the US probably couldn't.  In the EU, high rates are only possible as pretty much all Western European countries have top marginal rates over 45% (often those with the highest rates counter this with lower corporate rates), but in most Eastern European countries the top rates are generally under 30% but since incomes are significantly lower, you might pay less tax moving from Germany to Poland, but your income would decline significantly thus reducing the brain drain.  If standards of living in the Eastern European countries rise to comparable levels of Western European countries and rates don't go up you could see a brain drain then.