A 70% Marginal Rate on Top Incomes Is A Good Start, But It Doesn’t Go Far Enough

Freshman congressmember Alexandria Ocasio-Cortez is dominating headlines once again with a call for a 70% marginal rate on the highest incomes to help fund a Green New Deal. Conservatives are predictably apoplectic, calling it everything from socialism to slavery. The typical conservative sleight of hand is an act of substitution, pretending that taxes that apply only to the top parts of incomes of people making tens of millions of dollars a year somehow apply to all Americans.

Gratefully, both the left and the center left have joined forces to defend Ocasio-Cortez’ proposal as not only realistic and beneficial, but historically moderate. As Paul Krugman explains:

The controversy of the moment involves AOC’s advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? I mean, who thinks that makes sense? Only ignorant people like … um, Peter Diamond, Nobel laureate in economics and arguably the world’s leading expert on public finance (although Republicans blocked him from an appointment to the Federal Reserve Board with claims that he was unqualified. Really.) And it’s a policy nobody has every implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.

To be more specific, Diamond, in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rate to be 73 percent. Some put it higher: Christina Romer, top macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates it at more than 80 percent.

These rates work because really rich people can only buy so much stuff, and the extra money doesn’t really add significant value to their lives beyond the ego satisfaction of keeping up with the Joneses lucky (or corrupt) enough have that fourth yacht in the Azores. Also, while comparatively few people will pay the highest marginal rate on absurdly large incomes, the very presence of that bracket helps reduce the worst forms of inequality by compressing pre-tax income distribution, fixing the problem at a structural level and obviating the need for so much redistribution.

Others like Matt Bruenig have noted that not only did the United States have such marginal rates and higher (even up to 91% under such noted radical communists as 1950s Republican president Dwight Eisenhower), a number of modern capitalist countries like Sweden have similarly high marginal rates with no economic drawbacks.

In truth, not only is Ocasio-Cortez’ proposal not radical at all, it would have been boring and normative policy for most of the 20th century in western democracies. It would have been seen as moderate and unremarkable–even conservative!–during the 1960s in America before the civil rights era.

And indeed, while it does have the benefit of pushing the Overton Window to the left of America’s laughably hyperconservative bipartisan policy window, it does not go far enough. That’s because most of today’s truly obscenely wealthy don’t take their loot in the form of standard W2 taxable income. They take it in the form of investment dividends known as capital gains, which are currently taxed at a scandalously low 15 to 20 percent rate.

What this functionally means is that most Americans pay higher taxes on their work than the scions of the landed gentry do on their inherited trust funds and passive investment income. This is outrageous, particularly given that the American monomyth is that we are the land of opportunity, a place were noble dukes and lords don’t exist and where any Horatio Alger can make it to the top by dint of hard work. In reality, American social mobility is worse than in much more heavily taxed and historically class-segregated Europe.

In fact, a high marginal tax rate on extraordinary W2 income could almost be seen as regressive. The most notable people who take the most W2 income home tend to be athletes, celebrities, inventors, founders, etc.–the sort of rich people we most like to idolize. The people who take home the most investment income tend to the be the opposite: corporate executives, financiers and hedge fund types who buy mansions in the Hamptons and the Cote d’Azur by skimming off the work of others, laying off employees and stripping companies to boost quarterly returns which they then stash in the Caymans or covert into Maseratis and $10,000 suits. Why just tax LeBron James and Natalie Portman, people who actually work hard and provide real value to people’s lives, while leaving Bernie Madoff and Charles Koch free and clear?

An even better idea is implementing a wealth tax as they do in France and Norway:

Norway, for instance, in 2016 taxed at a rate up to 0.70 percent for all wealth over 1.4 million kroner ($162,568). France’s wealth tax in 2017 hit assets above 1.3 million euros ($1.4 million).

Slemrod, of the University of Michigan, said in an email that the wealthiest 1 percent of Americans own roughly one-third of the $107 trillion in wealth in America. This group collectively holds about $20 trillion in wealth above $10 million per household.

From there the calculation of wealth tax is simple: a 1 percent wealth tax on the wealthiest 1 percent of households above $10 million could raise about $200 billion a year, or $2 trillion over 10 years. Tedeschi, the former Obama official, found a 0.5 percent wealth tax on the top 1 percent could raise at most $3 trillion over 10 years.

Such a tax might be difficult to collect, but it would have essentially no negative economic impact. Unpatriotic scabs might attempt to dodge the tax, but it would be difficult to do so with a large enough number of countries implementing a similar tax combined with global trade and economic treaties punishing banks who agreed to abet the jet set’s attempts at global tax evasion.

Another idea would be a graduated capital gains rate similar to the graduated income tax, where the wealthiest investors would pay significantly higher rates than average investors. There are some complications with this idea (pension funds, for instance, would need to be exempted), but forcing the wealthy to pay higher rates on capital gains would help encourage healthier long-term investing over short-term profit-seeking. And while it might also lead to even more speculation on real estate by the wealthy, the greedy and shortsighted conversion of homes into piggy banks during the late 20th century and early 21st centuries has already created an enormous social problem that requires regulation in its own right if Millennials and Generation Z are going to avoid lifetimes of rent servitude. In other words, higher capital gains wouldn’t really create any new problems that aren’t already in need of solving, anyway–the core of which is that assets are unhealthily overvalued compared to the ability of current wages to afford them, and will continue to inflate unsustainably in an underregulated and undertaxed capitalist system.

In any case, Ocasio-Cortez has once again done a great service to America in pushing the boundaries of acceptable political discourse. But we still have a long way to go. Taxing outrageous incomes is a great start. But we also need to tax outrageous wealth.

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David Atkins

David Atkins is a writer, activist and research professional living in Santa Barbara. He is a contributor to the Washington Monthly's Political Animal and president of The Pollux Group, a qualitative research firm.