We need to talk about marginal tax rates

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Earlier this month, freshman Congresswoman Alexandria Ocasio-Cortez, the youngest woman ever elected to Congress, was interviewed by Anderson Cooper on 60 Minutes. One brief comment she made about taxes has the billionaire plutocrats of the New Gilded Age clutching their pearls and attacking her as a proxy for attacking progressive tax policy in general:

Anderson Cooper: This would require, though, raising taxes.

Rep. Alexandria Ocasio-Cortez: There’s an element where— yeah. There— people are going to have to start paying their fair share in taxes.

Anderson Cooper: Do you have a specific on the tax rate?

Rep. Alexandria Ocasio-Cortez: You know, it— you look at our tax rates back in the ’60s and when you have a progressive tax rate system. Your tax rate, you know, let’s say, from zero to $75,000 may be ten percent or 15 percent, et cetera. But once you get to, like, the tippy tops— on your 10 millionth dollar— sometimes you see tax rates as high as 60 or 70 percent. That doesn’t mean all $10 million are taxed at an extremely high rate, but it means that as you climb up this ladder you should be contributing more.

Anderson Cooper: What you are talking about, just big picture, is a radical agenda — compared to the way politics is done right now.

Really Anderson? High marginal tax rates were the norm in American tax policy for many years, when America still had a progressive tax system that built a vibrant American middle class.

It only became “radical” after wealthy plutocrats funded conservative anti-tax think tanks to promote the discredited and disproven “trickle down” tax theory — let the wealthy keep more of their money through lower taxes and they will invest it, and it will “trickle down” to the lower classes — a cruel myth unsupported by the data which the corporate media is more than happy to promote.

Phillip Bump of the Washington Post explains, Here’s how Ocasio-Cortez’s tax comments are being misrepresented:

We should be clear at the outset that the tax rate mentioned by freshman Rep. Alexandria Ocasio-Cortez (D-N.Y.) in an interview with “60 Minutes” was not a hard-and-fast proposal meant to be voted on in the House over the short term. Asked by interviewer Anderson Cooper what a “fair share” of taxes looked like for wealthier Americans, Ocasio-Cortez offered an example.

[Her example] was a broadly accurate statement: Fifty years ago, the tax rate on the highest bracket of income was indeed over 70 percent. It applied only to income past the first $400,000 or so until 1965, which is presumably what Ocasio-Cortez meant by the “tippy tops.”

Screen Shot 2019-01-30 at 1.34.20 PM

This is an important distinction that has been blurred in the aftermath of Ocasio-Cortez’s comments. If she were proposing that incomes above $10 million be taxed at a rate of 70 percent, she’s not suggesting that those making $10 million or more be taxed at 70 percent for every dollar. As The Washington Post’s Christopher Ingraham noted Monday, everyone would pay the same amount of tax on every dollar of income below that level.

Americans have trouble understanding marginal tax rates, and politicians and pundits are more than happy to exploit their lack of understanding.

Let’s now introduce the figure that has been most talked about from Ocasio-Cortez’s comments: a 70 percent bracket starting at $10 million.

In other words, a shift that looks like this.

EstimatedTaxPayments(Philip Bump/The Washington Post)

Now notice that until $10 million, the black line representing Ocasio-Cortez’s sort-of proposal and the gray dashed line indicating the status quo are identical. They diverge only after $10 million, resulting in added tax revenue indicated in the shaded green area.

How much could that raise? Our Jeff Stein talked to experts: $720 billion in a decade.

Now, remember, this applies only to people who make $10 million or more in a year and only to their incomes starting at that $10 million mark. Through dollar number 9,999,999, those people are still paying a bit less than 37 percent on their income. The effect of Ocasio-Cortez’s comments would be that wealthier Americans would keep slightly less of their income than they do now, but as they made more money, they’d still be keeping more income, too.

IncomeKept(Philip Bump/The Washington Post)

For all of the hand-wringing over her comments, not all of it sincere, it’s worth remembering that almost no one would be affected by such a change. In 2016, the IRS reported that only about 16,000 tax returns included adjusted incomes of at least $10 million — 0.01 percent of the 150 million returns filed.

The corporate media’s latest fave billionaire plutocrat of the week, Howard Schultz, says America doesn’t want far-left ideas like Alexandria Ocasio-Cortez’s 70% marginal tax targeting the wealthy:

Billionaire former Starbucks CEO Howard Schultz is no fan of Rep. Alexandria Ocasio-Cortez’s proposal to slap a 70 percent marginal tax rate on income above $10 million.

In an interview Monday night, he cited her idea as one of the reasons he could never run for president as a Democrat. Schultz believes the party has moved too far left, and he doesn’t believe in their tax and spending priorities.

“I respect the Democratic Party. I no longer feel affiliated because I don’t know their views represent the majority of Americans. I don’t think we want a 70 percent income tax in America,” Schultz told CNBC’s Andrew Ross Sorkin in New York.

He is, of course, WRONG.

Polls have shown that voters generally approve of the idea of taxing the wealthy at a higher rate. Indeed, a recent Hill-HarrisX survey of 1,001 registered voters found that 59 percent supported Ocasio-Cortez’s proposal. A Fox News poll published last week found that 70 percent of registered voters backed hiking taxes for families making more than $10 million a year.

Schultz’s veiled criticism of Democratic socialist Ocasio-Cortez’s idea to tax earnings over $10 million at 70 percent matched the concerns of many of the uber-rich who attended the World Economic Forum in Davos, Switzerland, last week. The billionaire elite expressed dismay at the direction the 29-year-old freshman firebrand from New York wants to take the nation.

Perhaps Congresswoman Alexandria Ocasio-Cortez is not the best spokesperson for this tax policy. She is young snd inexperienced and lacks gravitas. As a result, she is easily dismissed by the elitist billionaire plutocrats of the New Gilded Age.

So how about a highly experienced  and respected economist with a long track record of being right, and the gravitas of a Nobel Prize in economics, Paul Krugman. The Economics of Soaking the Rich (excerpt):

The right’s denunciation of AOC’s “insane” policy ideas serves as a very good reminder of who is actually insane.

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 ever 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.

Where do these numbers come from? Underlying the Diamond-Saez analysis are two propositions: Diminishing marginal utility and competitive markets.

Diminishing marginal utility is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it.

What this implies for economic policy is that we shouldn’t care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want.

So why not tax them at 100 percent? The answer is that this would eliminate any incentive to do whatever it is they do to earn that much money, which would hurt the economy. In other words, tax policy toward the rich should have nothing to do with the interests of the rich, per se, but should only be concerned with how incentive effects change the behavior of the rich, and how this affects the rest of the population.

But here’s where competitive markets come in. In a perfectly competitive economy, with no monopoly power or other distortions — which is the kind of economy conservatives want us to believe we have — everyone gets paid his or her marginal product. That is, if you get paid $1000 an hour, it’s because each extra hour you work adds $1000 worth to the economy’s output.

In that case, however, why do we care how hard the rich work? If a rich man works an extra hour, adding $1000 to the economy, but gets paid $1000 for his efforts, the combined income of everyone else doesn’t change, does it? Ah, but it does — because he pays taxes on that extra $1000. So the social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort — and conversely the cost of their working less is the reduction in the taxes they pay.

Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue.

See economist Jared Bernstein on this point, Our fundamental fiscal problem isn’t too much spending. It’s not enough revenue.

[A] new analysis by Jason Furman and Larry Summers comes to the same conclusion: “Without the Bush and Trump tax cuts (and the interest payments on the debt that went with them), last year’s federal budget would have come close to balancing.” They also bring an important international comparison to this table, concluding “that the United States has more of a revenue problem than an entitlement problem. U.S. spending on social programs ranks among the lowest in 35 advanced economies, yet the country has the highest deficit relative to its GDP in the group. That is because the United States brings in the fifth-lowest total revenue as a share of GDP among those 35 countries.”

Bernstein concludes, “there is no realistic, sustainable budget path that does not include increased tax revenue.”

Krugman continues:

[This is] something we can estimate, given evidence on how responsive the pre-tax income of the wealthy actually is to tax rates. As I said, Diamond and Saez put the optimal rate at 73 percent, Romer at over 80 percent — which is consistent with what AOC said.

An aside: What if we take into account the reality that markets aren’t perfectly competitive, that there’s a lot of monopoly power out there? The answer is that this almost surely makes the case for even higher tax rates, since high-income people presumably get a lot of those monopoly rents.

So AOC, far from showing her craziness, is fully in line with serious economic research. (I hear that she’s been talking to some very good economists.) Her critics, on the other hand, do indeed have crazy policy ideas — and tax policy is at the heart of the crazy.

You see, Republicans almost universally advocate low taxes on the wealthy, based on the claim that tax cuts at the top will have huge beneficial effects on the economy. This claim rests on research by … well, nobody. There isn’t any body of serious work supporting G.O.P. tax ideas, because the evidence is overwhelmingly against those ideas.

Look at the history of top marginal income tax rates (left) versus growth in real GDP per capita (right, measured over 10 years, to smooth out short-run fluctuations.):

Screen Shot 2019-01-30 at 2.40.23 PM

What we see is that America used to have very high tax rates on the rich — higher even than those AOC is proposing — and did just fine. Since then tax rates have come way down, and if anything the economy has done less well.

Why do Republicans adhere to a tax theory that has no support from nonpartisan economists and is refuted by all available data? Well, ask who benefits from low taxes on the rich, and it’s obvious.

And because the party’s coffers demand adherence to nonsense economics, the party prefers “economists” who are obvious frauds and can’t even fake their numbers effectively.

Which brings me back to AOC, and the constant effort to portray her as flaky and ignorant. Well, on the tax issue she’s just saying what good economists say; and she definitely knows more economics than almost everyone in the G.O.P. caucus, not least because she doesn’t “know” things that aren’t true.

And it’s not just Republicans. It is also self-described “centrist” billionaire plutocrats who seek to maintain their rarified elite status in the New Gilded Age.





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