I know you're just using this as an example, but it begs a question I've struggled with: is there any actual proof that marginal tax rates reduce productivity in high earners?
On its face it makes perfect micro-economic sense, but that's like saying a cache will never miss or a cow is perfectly spherical. It just doesn't match up with real life experience. I've never once heard someone say "well, I'd ask for that raise, but they're going to take so much in taxes it's just not worth the effort".
Anecdotally it hasn't changed my motivations one lick as I've moved up tax brackets, to the point that I recently joked with my dad "I guess I'm done trying now!" when I stopped qualifying for a certain tax credit after I'd negotiated hard for a nice raise.
Not-so-anecdotally there's plenty of research that has shown that money (in and of itself) is a terrible motivating factor[0].
Nobody is going to turn down a flat wage hike - but the damage of government tax policy is it shrinks the window of "what the company will pay for" and "what the worker will work for". Now we can't measure this for sure, but theory tells us it is a very likely, if not practically certain, outcome. The issue is you won't see it, because companies will just not be offering some jobs because they experimented and couldn't offer them at a wage that interested workers.
As a bonus, raises are a bit of an illusion. There is a huge amount of new money entering the system from somewhere (see https://www.federalreserve.gov/releases/h6/20170406/, about 5% p.a. increase). Most wage rises in theory are to balance that out so that you have enough dollars to call on the same real resources for hours of your labour.
The reality is that people weigh these costs against many factors and locales, clusters of business, family and institutions have powerful effects that add friction.
From a practical standpoint, the investment banker pulling in a $500k bonus in NYC with its 11.5% marginal tax rate doesn't move to New Hampshire because he'd take a 50% or more compensation haircut.
In a similar vein, nearly 10 years ago in Australia, a Mineral Rent Resource Tax (MRRT)[1] was proposed, wherein mining companies making a net profit of over 5% were taxed a bit extra on the amount over 5%. Of course the miners and their fans screamed bloody murder, and threatened to move offshore. Yeah, sure you guys are. You're going to move your profitable-by-definition business in a stable first-world country and away from working mines and supply chains.
Besides, miners mine where the minerals are; they don't move to Ireland and mine there because the taxes are low.
[1] One of the earlier names for the MRRT was the stonkingly-bad-PR move of calling it "Super Tax". It was meant to be a tax on 'super profits', but a) it sounds like an extra-powerful tax, and b) sounds like a tax on your superannuation.
If you are still talking about tax credits, you are no where near the top tax brackets. Note that income brackets extend to more than just your reported W-2s...
In scenario 2, government has higher revenue, not lower.
If high earners had to exert themselves twice as much or otherwise expend twice the resources to earn $20 instead of $10, maybe ending up with $9 instead of $12 would be rational. Of course in the real world it rarely works that way, only a few are in a position to work less to earn fewer commissions or work less overtime to avoid entering a higher tax bracket. The brackets are also a lot more graduated, it's not like you could earn $19 and pay $1 tax.
This is way out of proportion to real-life values, and the semantics of this equation change quite a bit with even minor changes.
For example, after your high-earner tax hike, the low earners are left with $9 and the high earners are left with $12. This is absurdist nonsense that does not match up with what happens in the real world. A person on $40k and a person on $80k have vastly different spending capacity after tax.
A person on $80k (~66k after tax) doesn't pay eight times the absolute amount of tax the $40k (~36k after tax) person does, and they retain their approximately two-times spending capacity.
The example is given to be demonstrative, not to represent a real world scenario.
Everything depends on the specific numbers, clearly. That's the point I'm trying to make as well.
I have literally never once heard or even heard of someone deciding to work less because they don't want to pay as much in taxes.
Anyway, she didn't like the sound of THAT idea. One of the many reasons she is my ex.
Not necessarily. That would be true if the absolute $$$ collected were the same, but that's not what is asserted.
Consider the following: 10 people earn $10 and pay $1 in tax. 10 people earn $20 and pay $5 tax.
The total tax collected is 20% of all income.
Suppose the government raises tax rates such that the $20 earners will now pay $8 tax.
Say 4 of the high earners stop working as much (since their marginal rates are so high).
Now you've got: 14 people earn $10 and pay $1. 6 people earn $20 and pay $8 tax.
The government now collects 24% of all income. It also collects a higher proportion from the lower income people than it did before. It has lower revenues and people are, on average, poorer. In other words, everyone loses.
So you can't just look at effective tax rates to determine whether raising top end tax brackets was good or not.