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Before We Crank Up Tax Rates, Let’s Have a Smart Debate
It now seems there’s going to be a national conversation about whether top federal tax rates should be dramatically higher. And for that, you can partially credit first-term House member Alexandria Ocasio-Cortez — as well as the extreme media attention given to her every policy utterance. But only partial credit here. At a time of a) high national debt that’s heading even higher, and b) increased inequality — including the creation of some truly massive personal fortunes — it’s a discussion that was probably inevitable.
And here’s hoping that discussion is informed and substantive. Unfortunately, early signs give reason for doubt. For instance: Pointing to past periods in American economic history that experienced both high individual marginal tax rates and strong economic growth is hardly dispositive. Not many people paid those high marginal rates or anything close. During the 1960s — a period when the top tax rate varied between 91 percent and 70 percent — the superrich paid an average federal tax rate of less than 30 percent. More broadly, notes the Tax Foundation, the all-inclusive tax rate (federal, state, local) is only about a half dozen points lower today for the top 1 percent of taxpayers than in those immediate post-war decades.
And there was a lot more happening back then with the American economy and growth than just the impact of tax rates, whether good or bad. Spared the ravages of war, the US was the planet’s economic colossus. It also benefited from a wave of productivity advances in the 1920s and 1930s that didn’t fully play out until after the war. Finally, unlike today, economic growth during those decades was greatly helped along by demographics in the form of strong labor force growth.
Also worrisome: the frantic hand-waving away of concerns about the possible unwanted economic impact from much higher taxes rates. Little is understood about the long-term impact of very high tax rates on taxpayer behavior and the economy. Those are as important as they are hard to measure. America, in particular, benefits greatly from people who take risks and make career choices influenced to some degree by hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” my AEI colleagues Aparna Mathur, Sita Slavov, and Michael Strain argue in their 2012 research note “Should the Top Marginal Income Tax Rate Be 73 Percent?”
But it’s early, and as this debate continues perhaps the quality will improve.
Published in Economics
Ahhh, the good ol’ days of “investing” in race horses and other loophole harvesting. I see Julian Castro (half of the Alamo City super twins) has been talking of the old 90% rates. I bet all Dems actually propose is re-instating the SALT deductions and don’t go near carried interest or other special items used by NYC or Hollywood.
I keep seeing stories like this on Facebook, and I’m really tempted to post comments like, “if the richest Americans didn’t really pay 70% in the 1950s, why should Americans assume that the richest Americans would really pay 70% if Ocasio-Cortez were to get her way?”
It seems to me that these stories simply reinforce the message that a 70% tax rate for the highest income earners wouldn’t be that big a deal.
The following is not sarcastic. It is a doleful recognition of our political reality. Read it and weep.
Once upon a time I thought that tax rates should be set to optimize economic growth. I have changed my opinion.
In the past generation the richest people in the United States, such as the residents of Silicon Valley have become hard core acolytes of a political party that fetishizes the current tax system and wants much higher rates. See e.g. Krugman’s recent NYTimes op-ed: https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html.
I think we should accommodate them. I would therefor propose that the marginal rate for the “1%” (>$425,000) should be 50%. We need to raise Social Security and Medicare taxes from their current 15.3% total to 20% and remove the cap on the amount of wages subject to OASDI tax.
In the spirit of charity, I would remove some of the nastier little gotchas from the system, such as alt-min and the $1,000,000 cap on wages. Why cap wages when the government gets 70% of them? Perhaps 80% when you count state and local taxes.
I understand that my idea is completely contrary to economic wisdom. But, Given the current configuration of political forces in this country, an economically optimal system is just plain impossible. The only way to get the political conversation to move forward is to give the left what it wants. When the inevitable happens, we will know who to blame.
Ask yourself why are we protecting the 1% from the consequences of their political posturing?
“Example is the school of mankind, and they will learn at no other.”
Edmund Burke
H.L. Mencken: “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”
How many of them actually report a top bracket income every year?
For example, Mark Zuckerberg’s salary is only $1 per year. Ditto for Elon Musk, Meg Whitman, Larry Page, Sergey Brin, Eric Schmidt, etc. etc. etc.
Getting stupid people to vote for you is the American way. The weeds of the details of policy, tax or otherwise, is not a place I’m guessing roughly 98% of the electorate does not get into, at all – ever.
Giving government more money to create even bigger problems than its already created is a recipe for madness. Which suits an Alexandria Ocasio-Cortez perfectly, as she’s about as useful as the guys sleeping on park benches that I walk past in the morning on my way into work.
But, but, but isn’t AOC an Economics major (and didn’t one of her professors call her brilliant?)?
She has better teeth though.
Here’s the thing; there is no need for discussion when it is plain to see that a) I wish I had more than I do, b) I know some people have even less than I do. Therefore, obviously people who have more than I have don’t deserve to have it when I don’t and especially those little people don’t and so we need to ‘ask’ those people to give us some. Or else. Oh, and remember, little people, that I got you that money because I made them give it to you.
No one should be happier or more wealthy or more secure or more virtuous than me.
I’d be okay with raising tax rates on the super rich if I thought they’d actually restrict it to the super rich.
But just like the progressives sold the income tax amendment by claiming it would only apply the the richest few percent, even if they start at the 10 or 20 million dollar level, it won’t be long before they decide that 1 million is rich. Then $500,000. Then $250,000. Ad before you know it we’ll have 50-70% rates for everybody making more than minimum wage.
I heartily endorse the sentiments of WalterSobchakEsq in comment #3 though.
There cap is on wages that can be deducted by employer, not paid.
Any honest economist would advocate for a flat tax without deductions. Any politician would advocate for a high tax rate with many deductions to be “sell”. It is clear which way the Dems are going. Things have changed a lot since Jerry Brown advocated for a 13% flat tax in the 1992 Democrat primary.
If the Dems really want the rich to pay their fair share the would impute income on stock options and unrealized capital gains. That won’t happen since all this talk is about improving the value of selling tax code changes. I bet Silicon Valley would rethink their love of Dems.
@Misthiocracy secretly:
The existence of one or more billionaires who game the system does not affect my point. We know where the the top earners live, and those places are now bright blue. There is NO reason to protect them from the vile ideas that their politicians espouse.
Those tax rates meant that if corporations paid their profits as dividends to investors the top income folks would receive 3 cents on the dollar of profits. Needless to say this had profound effects on the entire corporate culture and is one of the reason we lost control of boardrooms. Investors didn’t want dividends they wanted capital gains, even better unearned capital gains. Example; if a corporation used debt and their own stock value to acquire another corporation that had already depreciated its capital goods, it would become bigger would have a larger cash flow, expensible finance and mostly non taxable income written off against depreciation. It’s perceived wealth and stock price would grow, stockholders could get lower taxed gains, or just borrow on margin and buy more, match stock losers with winners and not even pay capital gains. Of course bigger corporations had to pay their managers more. They became rich, didn’t get dividends ether but options. They also had control of corporate donations. This is why corporations should not pay taxes at all and if we insist on income taxes, top rates should be low enough to 1)actually be paid so they raise revenue. 2) not cause distorting tax avoidance behavior.
The innumerate Ocasio Cortez just had a eureka moment because learned how marginal brackets work and thinks everyone else is as ignorant as she is.
The truly wealthy have enough money to ensure they will not pay those high rates, or anything close to those rates. Only a fool (Democrat/Progressive) cannot understand this.
The top earners are the billionaires. If you’re talking about the people earning only six-figures per year, you aren’t talking about the top earners, and I still think they’re smart enough to protect themselves.
Now I’m confused. I thought your argument was they they should get the tax rates they ask for.
@Misthiocracy secretly:
“For example, Mark Zuckerberg’s salary is only $1 per year. Ditto for Elon Musk, Meg Whitman, Larry Page, Sergey Brin, Eric Schmidt, etc. etc. etc.”
Page and Brin Yes, Schmidt at least collected ~$4.75 million in 2017. I am not reading any more proxy statements. I used to write them. I personally know of billionaire founders and controlling stockholders of public corporations who did draw large salaries because they needed the cash flow.
But that misses my point. I am not talking about economics or any individuals ability to fiddle the tax code. I am talking about politics. The current political equation is that rich=blue. Billionaires will not carry any elections. If any merely $700,000 year accountant gets burned, so what. It will teach them not to follow billionaires. They want higher tax rates. Give them higher tax rates.
People who believe in catastrophic anthropogenic global warming and in trans-genderism will not have their opinions changed by argument.
“There is reason to protect them from the vile ideas that their politicians espouse.”
I erred. the sentence should read:
There is NO reason to protect them from the vile ideas that their politicians espouse.
@DonG:
The limit is enforced against the payor, not the payee. So what, I just want to look like I am not vindictive.
As for taxing unrealized gains, the Canadians tried that and it didn’t work. And if you have lived through stock markets like last month, you might be skeptical about the idea.
I understand economists thinking about taxation, and I do not dispute it. But, we will never be able to implement any of it until the Democrats climb down off their high horses.
@TBA: “She has better teeth though”
Yes, but her real assets are south of her mouth.
@Barry Jones:
“But, but, but isn’t AOC an Economics major (and didn’t one of her professors call her brilliant?)?”
My guess is that he was not looking at her teeth, or listening to her.