- Aug 20, 2000
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I don't think I need to explain why the idea of a 70% marginal tax rate on income above $10 million a year has come up, so I'll post an article about some research on the issue below and instead skip directly to discussion.
Here are my thoughts on the idea; please feel free to quote and poke holes in them:
Vox - Alexandria Ocasio-Cortez is floating a 70 percent top tax rate — here’s the research that backs her up
Here are my thoughts on the idea; please feel free to quote and poke holes in them:
- There is fairly strong consensus amongst economists that the idea taxation scheme for government is relatively high income taxes and relatively low corporate taxes. I encourage you to read the linked study - it's awesome - but basically the reason for this is simple: Corporations can more easily artificially move where they're located to lower-taxed communities. A high net-worth individual could move to the Bermuda, Monaco or the UAE... but theoretically it's hard to replicate the lifestyle in Canada or the United States and fewer would do this than you'd think. So the argument that these individuals would just move is likely not correct.
- I think that wide disparities in wealth in a society is necessarily bad for that society. Put another way, generally speaking, all citizens who make between $50,000 and $10,000,000 in income a year have the same macro-level wants and needs from their community. They want the roads to be reasonably well maintained in their area. They want public parks for their kids to play in and access to good local healthcare and mostly send their kids to public schools. They vote for people who will take care of local and state-level concerns. The wants and need of someone making $100,000,000 a year, however, are probably quite different. They're not bad people just because they're making a lot of money, but their concerns aren't local; and if they are, they tend to be autocratic because they can put serious money behind a candidate or idea. The need to work with others in your community is dramatically lessened.
- It would mean a significant investment into an area of dire need: Under Ocasio-Cortez's model, the money would be primarily sent towards revamping industries that drive carbon emissions. Ultimately we all need the planet to not get caught into a forever-warming cycle that ends up destroying most of the flora and fauna that exist today and leads to enormous population migration.
Vox - Alexandria Ocasio-Cortez is floating a 70 percent top tax rate — here’s the research that backs her up
In an interview that aired Sunday on 60 Minutes, America’s most widely covered new House member Alexandria Ocasio-Cortez (D-NY) floated the idea of a top marginal income tax rate as high as 70 percent as part of a plan to finance a “Green New Deal” that would aim to drastically curb America’s carbon dioxide emissions.
This is not a formal policy proposal. Indeed, the whole idea of offsetting the budgetary cost of decarbonization with taxes is somewhat at odds with the main currents of thought in the Green New Deal universe, which lean more toward the idea that deficits don’t matter and the costs shouldn’t be paid for at all.
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Historically, the United States used to have many more tax brackets, and the top marginal tax rates were extremely high. Under Eisenhower, the top earners paid a 91 percent marginal rate, falling to Ocasio-Cortez’s proposed 70 percent under Kennedy and Johnson, before falling to 50 percent after Ronald Reagan’s first big tax cut, and then down to 38 percent after the 1986 tax reform.
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MIT’s Peter Diamond and Berkeley’s Emmanuel Saez relaunched this debate with a landmark 2012 paper that argued for a 73 percent top income tax rate in the United States.
This conclusion relies on two subsidiary points. One is the notion that for the very rich, the subjective value of an extra dollar is essentially $0. In other words, while a poor person’s life may get a lot better if he gets a little bit of extra money, someone like Mark Zuckerberg isn’t going to care at all.
It follows that regardless of how much money we think the government should spend, we should be squeezing the richest people as much as possible to keep taxes lower on the less wealthy who will miss the money more. They then do empirical calculations that lead them to estimate that a rate of 73 percent or so would maximize revenue — higher than that and taxation becomes counterproductive because people work less.
In a separate paper that Saez wrote with Thomas Piketty and Stefanie Stantcheva, the authors argue for an even higher rate on somewhat different grounds.
Their argument is that, empirically, CEO pay and pretax inequality is higher in countries with lower top marginal tax rates. In lower tax countries, they believe, CEOs work really hard to maximize their own pay whereas in higher tax countries they accept lesser compensation, which leaves more money left over for other people.
An even more aggressive 2016 paper from Benjamin Lockwood, Charles Nathanson, and Glen Weyl argues that confiscatory taxation would be good for the economy because it would discourage talented people from entering lucrative lines of work. In a world of low taxes, they show, talented people have strong incentives to work in legal or financial professions rather than be teachers or research scientists. But the social reward to having really good traders or corporate lawyers is either low or negative, whereas the social reward to having excellent teachers and scientists is high.
So while Ocasio-Cortez’s proposal is certainly extreme relative to the policy status quo — and unquestionably something many economists would denounce as economically ruinous — it’s actually moderate compared to what Saez, Piketty, and Stantcheva, or Lockwood, Nathanson, and Weyl call for since she’s sticking with the “mere” goal of raising revenue.
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