Thursday, January 10, 2019

Alexandria Ocasio-Cortez offers a not-so-radical proposal for a progressive tax rate system

Here’s another feature from Judd Legum: Redefining “radical”

Alexandria Ocasio-Cortez, the freshman Congressman from New York, was interviewed on Sunday on 60 Minutes. During the interview, Anderson Cooper pressed her on how she would pay for an ambitious proposal, called the “Green New Deal,” that aims to end fossil fuel use in America quickly.

Ocasio-Cortez suggested taxing income over $10 million at 60 to 70%. Cooper described that as a “radical agenda.”

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 maybe 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.

Cooper’s response reveals how our national political conversation is profoundly skewed. The current economic structure — one where most wealth flows to the top — is assumed to be moderate and reasonable. Any meaningful deviation from the status quo is considered “radical.”

It doesn’t have to be this way.

And as a matter of fact, it had not been that way until Republicans, starting with Ronald Reagan, began giving out tax breaks to their wealthy donors. Legum continues.

From 1932 to 1980, the top tax rate in the United States exceeded 60%. In 1980, the top marginal rate was 70%.

Ocasio-Cortez’s proposal is more moderate than the actual system of taxation in the United States in 1980. At that time, in today’s dollars, all income over $658,213 was taxed at 70%. Ocasio-Cortez is proposing returning to the 70% rate but only for income over $10 million.

As of 2016, “approximately 16,000 Americans earned more than $10 million each,” representing “fewer than 0.05 percent of all U.S. households.” Very few people would be impacted by Ocasio-Cortez’s plan, which would raise about $720 billion over the first ten years.

Compare Ocasio-Cortez’s suggestion to the tax plan enacted into law by Trump and the Republicans in December 2017. That legislation reduced the corporate tax rate to 21%. That’s lower than the corporate tax rate has been since 1939.

Ocasio-Cortez’s proposal, as Paul Krugman notes, is grounded in research by Nobel laureate Peter Diamond. A study by Diamond and another economist, Emmanuel Saez, concluded that the optimal top marginal tax rate was 73%. Diamond and Saez’s work is based on the marginal utility of an extra dollar for multi-millionaires. They argue that an additional dollar for the obscenely wealthy has very little value. This makes intuitive sense. If someone makes $20 million per year, an additional $1000 will not have a meaningful impact on their life.

Therefore, Diamond and Saez argue, the rate should be set at whatever could generate the highest tax receipts. That’s how they arrived at 73%. Other economists, like former head of President Obama’s Council of Economic Advisers, Christina Romer, think it should be higher. Romer argues for a top rate of 80%.

Republicans insist on lowering the top rate — Trump’s legislation in 2017 lowered it from 39.6% to 37% – claiming that a lower top rate will create more economic growth. No serious research supports this because it’s not true. Data over the last 60 years shows no correlation between a lower top rate and higher growth.

America’s current policy is based on an economic theory that has been disproven by data. Deviations from that policy, based on work from top economists, is considered “radical.”

There is a well-financed army of politicians and lobbyists who promote ideas that benefit the very rich as if they benefit everyone. After Ocasio-Cortez’s interview, they went on the attack.

Congressman Steve Scalise (R-LA), a member of the House Republican leadership, said Ocasio-Cortez’s plan was to “[t]ake away 70% of your income and give it to leftist fantasy programs.”

This, of course, is not what Ocasio-Cortez was suggesting. The rate would only apply to income over $10 million, which means it would not impact 99.95% of Americans. Even someone who earned $11 million, for example, would only pay a 70% rate on their final $1 million.

Grover Norquist, who is paid handsomely by the very wealthy to advocate for lower taxes, piled on, comparing Ocasio-Cortez’s proposal to slavery.

In a subsequent tweet, Norquist said he didn’t believe a 70% rate would apply only to the rich. Norquist, however, is paid not to understand ideas like this.

The Washington Post also reported that “Ocasio-Cortez wants higher taxes on very rich Americans.” They went to work on the proposal and reported Here’s how much money that could raise. With the help of tax experts, we produced some back-of-the-envelope estimates.

Here are the top level figures.

(1) $720 billion/decade: Ocasio-Cortez’s suggestion for nearly doubling taxes on people earning more than $10 million.
(2) $3 trillion/decade: A wealth tax on the top 1 percent similar to those in Europe
(3) $3 trillion/decade: Doubling income taxes on the top 1 percent

Check out the numbers supporting each estimate by the Post’s tax experts.

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