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Last November, Alexandria Ocasio-Cortez, a 29-year-old with working-class roots, made waves by being the youngest woman to be elected to Congress. In a January 4 interview with Anderson Cooper on CBS’ 60 Minutes program, she made news again by floating the idea of raising the top marginal tax rate to as high as 70% on income over $10 million. “People are going to have to start paying their fair share in taxes,” she said. “As you climb up this [income] ladder, you should be contributing more.”
Predictably, battle lines quickly were drawn between proponents and opponents of tax increases. University of California, Berkeley economics professors Emmanuel Saez and Gabriel Zucman wrote in a New York Times op-ed that the rich “can contribute more to the public coffers. And given the revenue needs of the country, it is necessary.” An opinion piece by the editorial board of The Wall Street Journal criticized a 2011 analysis by Saez and economist Peter Diamond, saying both men “admit that taxes can have detrimental long-term effects on growth. Yet they ignore the long-term effects of marginal tax rates on growth.”
At present, the top marginal federal tax rate is 37%. It is not the same as an average tax rate, which is the actual amount of taxes paid. According to the Tax Policy Center, if a taxpayer earning $100,000 pays $15,000 in taxes, the average tax rate is 15%. The marginal tax rate is the tax paid on incremental income — it would be different rates for different slices of income. The first few bucks would be taxed at a different rate than the next rung up, and on so. Ocasio-Cortez’s proposal would tax amounts in excess of $10 million at 70%. Below $10 million, the rate is lower. However, the federal rate is in addition to state and local taxes.
A Nonpartisan View
The Penn Wharton Budget Model, a nonpartisan, research-based economic analysis tool from the University of Pennsylvania, also waded into the debate to try to get to the unvarnished truth. It performed a detailed, though not exhaustive, analysis of the proposal since Ocasio-Cortez didn’t provide many details of her plan. The model assumed that high-income owners of ‘pass through’ businesses — where company profits flow to the owners — would reorganize as ‘C’ corporations to lower their taxes, since the corporate tax rate is a much smaller 21%.
“I think the main objective here is to basically make a statement about the desire to take some of the income away from people who are doing extremely well.” –Alan Auerbach
The Penn Wharton Budget Model’s conclusion: These tax avoidance activities “could cause the new 70% tax rate to raise only 43% of the revenue that would otherwise be raised.” The model projected that a 70% marginal tax rate on income above $10 million would straight up raise $382 billion between 2020 and 2029. If one includes changes in taxpayer behaviors, the estimate drops to $353 billion. Allowing for business income shifting with full payout, the projected revenue would fall even more, to $248 billion. If this income is deferred indefinitely, then revenue plunges to $164 billion — or 43% of the original $382 billion.
According to the Tax Policy Center, the U.S. has seen margin tax rates of as high as 94%, in 1944 and 1945. The top rate began declining in earnest in 1964, which was in the 70-plus percent level, down to 50% in the first half of the 1980s, falling further to 35% in the early 2000s to 37% today, after last year’s tax cuts.
Past Experience
On the surface, the 70% marginal rate is likely to have difficulty achieving its revenue objective. For one, only a relatively small number of taxpayers even earn incomes of more than $10 million a year, according to Richard Prisinzano, senior economist with the Penn Wharton Budget Model, who previously worked at the U.S. Treasury Department’s Office of Tax Analysis. He recently talked about the Ocasio-Cortez marginal tax rate proposal on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)
If Ocasio-Cortez’s goal was to raise a lot more tax revenue, then rate increases should start at incomes “a lot lower than $10 million,” said Alan Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley, who also spoke on the radio show. He noted that back in the 1960s, the top marginal tax rate was above 90%. However, the high rate was applied to “people with incomes starting in the few million dollars,” Auerbach said. “I think the main objective here is to basically make a statement about the desire to take some of the income away from people who are doing extremely well. I think there’s a sense that somehow, they are not entitled to it.”
But over time, there was a realization that high rates generally were less productive because not only did they affect just a small group of people but they also encouraged tax avoidance activities, Auerbach said. “It didn’t necessarily raise a lot of revenue.” Especially when people add in state income tax rates — which would be high for New York and California — the top marginal tax rate could reach the 80-plus percent level, he said. “For tax rates like that, I think the amount of tax avoidance … would make it sort of counter-productive from a traditional standpoint of simply trying to balance revenue needs with economic distortions.”
“If you’re looking for pure revenue, this might not be the right way to do it.” –Richard Prisinzano
Closing Loopholes
Prisinzano said that in the past, when the top marginal tax rate was high, many people used corporations as tax shelters. Ocasio-Cortez’s proposal, which would nearly double the current top rate for the wealthy, could have the same effect. “People with $10 million of income tend to have a lot of business income, a large portion of which comes through ‘pass-through,’” he said. “It would be pretty easy to move that over to corporations, and that would facilitate this hiding. … If you’re looking for pure revenue, this might not be the right way to do it.”
Auerbach acknowledged that the government has closed “some of the most egregious tax avoidance opportunities.” For example, in the past, partnership losses were reported to the IRS by wealthy people who “weren’t really engaged in businesses but were just using partnerships as tax shelters.” The Tax Reform Act of 1986 closed that loophole. “But that was more or less getting rid of fake businesses,” he said. “If you have real businesses, it’s a lot harder to circumscribe the avoidance activities.”
Join The Discussion
7 Comments So Far
Peter Burgess
It bothers me that the podcast has a lot of detail but rather little strategic vision. AOC may have worked in a bar (but she also has a degree in economics from a not-so-bad university) and understands people (not millionaires) and their problems a whole lot better than most. As I see it, the concentration of wealth and inequality has been a process that has been ongoing since the 1980s facilitated not so much by wealth creation but by wealth capture. Household wealth of the many has been declining catastrophically while the system has enabled consumption (and profits) to remain high … a situation that has run its course in the US and the EU and a crisis is waiting to emerge. The Green New Deal is maybe the most important initiative in my lifetime though not yet appreciated by most of the academy nor indeed business and political leadership.
Sunil Misra
A former bartender? Accurate. She graduated cum laude from Boston University’s College of Arts and Sciences in 2011, majoring in international relations and economics. And she worked politically. So the article starts out with a denigrating bias. And it will raise “only” 43 percent of the revenue. For me, that is a very good start. And that means that perhaps 10,000,000 per year is too high a bar. If the obscenely rich think paying taxes is bad, maybe they should to to a society that is corrupt, led by oligarchs, plutocrats, and build walls topped with glass, behind security systems, armed guards, poor infrastructure and in constant danger. In developed societies and economies, these rich are benefitting because they live in peace. Admired (why I don’t know). And let us put a little intellectual effort into closing loopholes for tax avoidance, most of which are deliberately created by those who buy political parties and politicians. America is no longer that shining city on a hill, if it ever was given slavery, Jim Crow, and genocide. Now it is a representative plutocracy, not a representative democracy. And the rich will pay for that short sightedness. They are always and incessantly complaining we didn’t save their hats, to reference Franklin Delano Roosevelt.
When three people in America own as much as the bottom half, 160 million, of Americans, something is horribly wrong. Especially for a nation and Republican cult of money that constantly pontificates how much it is a Christian nation. If they could, they would pay for more orifices to stuff money into. Enough. Good for you, cum laude graduate of Boston University, Alexandria Ocasio Cortez. And being 29 is better than being a bought and paid for old, overwhelmingly white, Republican representative for the plutocracy.
Alain Gardner
As a society, we have forgotten how much of the wealth accumulated by few is due to the environment we live in. It is not only due to their great business acumen that they are doing so good. If it were so, businesses leaders in Iraq or in Afghanistan or other countries where there is no income tax would quickly amass bigger fortunes as they are able to keep all their revenues.
In the late ’40s to the early ’70s, wealthy and prosperous business leaders recognized they had a duty to support and contribute to the society; that is when America was great!
In parallel, you also need a government that is focused on the development and the well being of the entire population through healthcare and better education to match or exceed international standards for everyone living in the US .
By not doing so, it is obvious that the US slowly losing its fight for economic dominance and innovation against countries that consider education and health care as national priorities.
By not returning their fair share of the collective effort, they take away from the environment and ultimately cause the environment to decay. Hence we can see more desperation, more violence, more homegrown terrorism, and mass shootings.
By the language used, It seems Auerbach does not make this link ” I think there’s a sense that somehow, they are not entitled to it.” The reality is that they are partially entitled to it and the society that makes their venture possible is also entitled to it.
The Penn Wharton Budget Model should identify and develop a model of required tax rates that will generate maximum growth for the entire society and provide for the basic needs of all its members.
Martin Kessler
After reading the above opinions I feel certain issues deserve a comment. I think it all comes down to they have been taught to see much suffering in free-market capitalism. Burgess is quick to bring up inequality. He has not yet understood the phrase “All men are created equal” was intended to be taken as a sociopolitical statement, not literally. Sunil is not only unhappy with capitalism he cannot resist connecting this to the horrors of the African Slave Trade, Jim Crow and the racial consequences of negroes marooned on a continent with no way to return home. At least, he alludes, AOC is not among “the white”. And for Gardner, I’m certain the business leaders of Iran or Afghanistan are doing very well for themselves compared to the mass of the people in the country. He should recall the willingness of society to bear a 90% marginal rate in the 40’s as it was a time of war and as bad as this country is a UN Survey reporting on the willingness of people to migrate to America, Europe, or Asia the majority–158, 000,000 would prefer to live in America.
I think it’s time to counter the negativism of otherwise intelligent people before it gets out of hand and ruin it for the rest of us citizens.
Sat Ganesha Khalsa
Editing?…drama wording?…are your readers and listeners just as caught by this (former bar tender from New York)?
My understanding is the research says yes, we are; but I am looking for a publication, university, myself and others who are trying to break the trend.
I should have waited overnight to post and reword it…but
I am wondering what you could/would do the get back your respect/reputation?
I support her idea in general. Even though your data/experts show it weakness, politics is about taking actions that have a chance of moving forward (being passed) and her idea is a great step forward.
Jim Bozin
Exactly what results when one delves into speculation => Divergence.
The US Govt must simply balance its budget.
However, you want to spell it; morally, ethically, or any PC way, it’s not sound to leverage so much of the future at the expense of the current. There’s words for it – going “broke”. Arguing class against class, whos’ pocket it comes from, isn’t a fair approach to solve this. It takes leadership. Sorely missing in TV sound bite politics today.
The consequences have ballooned to enormous. We’re around 1.1.-1.2 X GDP in debt and that has nasty consequences. More in the last 20 years than the first 200+. So generational greed/malfeasance/corruption is in there somewhere too.
Sunil Misra
Martin Kessler: Sarcasm aside, if you think the long lasting effects, impacts of slavery, Jim Crow, and genocide are meaningless, you are not a historian or an economist. And if you don’t know the advantages, social and economic, of being white, you are doubly without understanding of history and economics.
And as for all men being created equal not being literal, that is a straw man. The chapter of John Locke’s Second Treatise, “Of Property,” makes it clear that an equal start should be provided so that only those who are rational may succeed of their own efforts. That is capitalism. The present system is not capitalist. It is to capitalism what Stalinism is to communism or socialism. We now have a representative plutocracy.
It is now time to counter the endless greed, avarice (which Locke objected to and which is the Achilles’ heel of capitalism) of otherwise intelligent people before it gets out of hand and ruin it for the overwhelming majority of Americans, of people. And, please, read more history. It is the antidote to day trading in factoids.