TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, January 20, 2019

Alexandria Ocasio-Cortez's Proposed 70% Top Tax Rate

FiveThirtyEight, Alexandria Ocasio-Cortez Wants To Raise Taxes On The Rich — And Americans Agree:

new poll from The Hill and Harris X found that 59 percent of registered voters supported imposing a 70 percent tax rate on every dollar over the 10 millionth a person earns in a year. (Tax rates that apply only to income over a certain threshold are called marginal tax rates.) The idea even received bipartisan support: 71 percent of Democrats, 60 percent of independents and 45 percent of Republicans said they were in favor. 

Wall Street Journal, How Wealthy Americans Like Jack Benny Avoided Paying a 70% Tax Rate:

Many top earners during the high-rate era, such as politicians Dwight Eisenhower and Ronald Reagan, entertainer Jack Benny and librettist Alan Jay Lerner, didn’t pay the top rates. In 1952, for example, when the top rate was 92%, the highest-earning 1% of taxpayers had an average rate of 32%, according to Elliot Brownlee, a tax historian and emeritus professor at the University of California, Santa Barbara. “When top tax rates were high, there was always a large gap between the stated rates and what the highest earners actually paid as a percentage of their income,” says Joel Slemrod, an economics professor at the University of Michigan.

WSJ

The Atlantic, Alexandria Ocasio-Cortez Has the Better Tax Argument:

Entrepreneurs and center-right economists insisted that raising taxes dramatically on the rich would undo America’s ability to spark innovation and attract entrepreneurs who want to start companies and solve big problems.

In the abstract, their case is clear. “If income taxes are high enough, start-ups stop happening,” said Paul Graham, the founder of Y Combinator, the country’s preeminent start-up incubator.

That perspective is backed by some research. A 2018 paper by Charles I. Jones at Stanford University Graduate School of Business found that raising the top marginal tax rate to 75 percent would “reduce innovation and lower GDP per person in the long run by about 6 percent.” Another recent paper found that the introduction of the income tax in 1909 suffocated innovation in the next 100 years. The conservative economists R. Glenn Hubbard and Douglas Holtz-Eakin each published papers earlier this century arguing that raising taxes on the rich “discourages entry into self-employment” and makes self-employed people less likely to hire workers. ...

Let’s lift our eyes from theory and look out into the real world. Does it reflect conservative logic? I don’t think so.

  • The two most important hubs of innovation in the United States are the Bay Area and New York City. But according to the Tax Foundation, California and New York have the 48th and the 49th most favorable business-tax climates in the country. Sky-high tax rates in Mountain View and Manhattan haven’t blunted their advantage. ...
  • The United States has lower marginal tax rates on income than much of the Organization for Economic Cooperation and Development does, but the U.S. entrepreneurship rate is lower than those of many Western and Central European countries.
  • When the top marginal tax rates were about 90 percent in the 1950s and ’60s, the U.S. productivity rate was higher, men landed on the moon, and scientists invented the internet, satellites, and the transistor, planting the seeds of the entire computer revolution that now defines innovation. ...

These anecdotes don’t prove anything magical about high marginal rates, or low marginal rates. Rather, they suggest that if taxes matter, other stuff matters more—such as culture, local professional networks, and the state of scientific research. ...

If Ocasio-Cortez wanted to destroy the American culture of innovation, she wouldn’t propose a barely applicable marginal tax rate, which exists within a larger tax code, which itself exists within a larger fiscal policy. Instead, she would reduce research funding, protect employer-sponsored insurance to keep tomorrow’s founders locked inside today’s cubicles, and increase student debt to make youth entrepreneurship more precarious. Oh, wait.

Bloomberg, Economists Don’t Know What the Top Tax Rate Should Be:

Beware, Alexandria Ocasio-Cortez: Excessively high levies are just punitive and don’t maximize revenue. ...

A paper by Peter Diamond and Emmanuel Saez [The Case for a Progressive Tax: From Basic Research to Policy Recommendations] is widely cited in support of a top rate of 70 percent or more. They’re good economists, to be sure -- none more authoritative on this subject. But you have to wonder whether all the people citing their study have actually read it. The authors argue that the optimal tax rate on very high incomes probably lies in a range between 48 percent and 76 percent, though the lower part of that range might be more efficient for a tax system that, like the current U.S. code, provides many opportunities for avoidance. ...

I’d be surprised if the revenue-maximizing tax rate on the highest incomes in the U.S. was as high as 70 percent. But even if it could be established that 70 percent was the optimal rate, that wouldn’t even begin to make the case for setting the top tax rate at that level.

Clearly, the moral reasoning underlying the idea of an optimal rate of tax is threadbare. To economists, the optimal rate on high incomes is the one that maximizes social welfare -- and this in turn is the revenue-maximizing rate, if you accept the assumption that additions to the incomes of the rich have little or no social value. This is questionable even as economics. (Imagine that everybody in the U.S. making more than $10 million a year emigrated. The country’s most successful entrepreneurs would be among them. Would the only cost to the rest of the country be the loss of tax revenue?) ...

Granted, it would be good to know what the revenue-maximizing top rate is. Setting the tax any higher than that would be self-defeating in fiscal terms – unless the goal was to punish the rich as an end in itself, and the non-rich were content to pay something to do that. But the optimal tax, whatever it may be, is best seen as a fiscally prudent ceiling, not the scientifically determined correct rate. What economists regard as optimal isn’t actually optimal. 

https://taxprof.typepad.com/taxprof_blog/2019/01/alexandria-ocasio-cortezs-proposed-70-top-income-tax-rate.html

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Comments

Even if the very rich are OK with handing over 70% - some of the richest give away more than that! - would government reliably do a better job managing the golden goose? Do tax loving locales have great public education? Do people flee to our socialist neighbors or from them?

Posted by: Anand Desai | Jan 20, 2019 8:23:20 PM

If ACO and her friends take power there will be a response that makes the Tea Party look like, well a tea party

Posted by: Mike Livingston | Jan 21, 2019 4:21:11 AM

Scary stuff.

Posted by: taxtaxtax | Jan 21, 2019 11:25:11 AM

California's top rate is 13.3%, even on capital gains from sale of your home. A federal top rate of 56.7% would suffice to bring to total top rate to 70%. This bears watching.

Posted by: AMTbuff | Jan 22, 2019 3:21:08 PM

In the 1950s, the federal government, in terms of real $ and % of GDP, was 1/3 smaller than it is today.

I'm willing to go with AOC's 70% top marginal tax rate, immediately, provided I get that 1/3 reduction in federal spending, immediately.

Now that's compromise...

Posted by: MM | Jan 22, 2019 7:07:53 PM

"Do tax loving locales have great public education?"

Massachusetts public schools have among the highest PISA scores in the world in both reading and math.

Posted by: Unemployed Northeastern | Jan 22, 2019 11:11:50 PM