Political Rorschach test Rep. Alexandria Ocasio-Cortez (D-NY) sparked a lively fiscal debate this week after suggesting in an interview that the top marginal tax rate in the U.S. should be as high as 70 percent.
Speaking to Anderson Cooper on CBS’s “60 Minutes,” the 29-year-old lawmaker said that “people are going to have to start paying their fair share in taxes” in order to fund a new progressive agenda aimed at reducing economic inequality and combating climate change.
More specifically, Ocasio-Cortez said that marginal rates at the top of the income spectrum need to be much higher, as they were in the post-war era: “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 10 percent or 15 percent, etc. 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.”
The reaction to Ocasio-Cortez’s comments was swift and at times severe, especially on the right. Here’s a sample:
- House Minority Whip Steve Scalise (R-LA) tweeted that Democrats wants to “Take away 70% of your income and give it to leftist fantasy programs.”
- Anti-tax activist Grover Norquist compared Ocasio-Cortez’s tax policy ideas to slavery, tweeting “Slavery is when your owner takes 100% of your production. Democrat congresswoman Ocasio-Cortez wants 70% (according to CNN) What is the word for 70% expropriation?”
Putting the political hyperventilating aside, however, Ocasio-Cortez’s comments raise some interesting points about tax policy. Here’s a rundown of insights from critics across the political spectrum:
Top marginal tax rates have been quite high in the past: Ocasio-Cortez is right on the history as far as tax rates are concerned. According to the non-artisan Tax Policy Center, the top marginal tax rate was higher than or equal to 70 percent every year from 1936 to 1981, sometimes reaching over 90 percent (review the rates since 1913 here). So Republican complaints that Democrats want to take 70 percent of their incomes are off base, conveniently ignoring the difference between marginal and effective tax rates.
But the key number is the effective rate: High marginal rates don’t necessarily translate into high average rates — or significantly higher revenues for the government. There aren’t many taxpayers who would face Ocasio-Cortez’s top rate, and much of their income would be shielded through deductions and the progressive tax structure itself. Effective tax rates for the wealthy changed surprisingly little over the last few decades, even as the top marginal rate changed by dozens of points. Given the relatively weak fiscal effect of a high top marginal rate, Howard Gleckman of the Tax Policy Center said, “no, Rep. Ocasio-Cortez, we probably can’t pay for a big new ‘green’ agenda simply by raising the top income tax rate to 70 percent on those at the ‘tippy top’ and, no Rep. Scalise, even if we did, the government would not be taking 70 percent of people’s income.”
Most economists agree rates could be higher: Economist Paul Krugman said that Ocasio-Cortez “is fully in line with serious economic research” when it comes to high marginal tax rates. Recent studies suggest that the optimal top marginal tax rate — the rate that brings in the most revenue — is in the 70 percent range, and one study, by economist Christina Romer, found that the optimal level was 83 percent. While Laffer Curve enthusiasts will no doubt tear their hair out upon seeing such high numbers, it seems pretty clear that current U.S. tax rates are well below the optimal level for revenue collection. And the issue may be a political winner, too, since opinion polls show that most Americans support higher tax rates on the rich.
But revenues would likely still fall short: No fan of Ocasio-Cortez’s progressive agenda, the Manhattan Institute’s Brian Riedl estimates that a top marginal tax rate of 70 percent on incomes over $10 million would raise less than $50 billion per year, nowhere near enough to pay for massive projects like a “New Green Deal” or single-payer health care. The Washington Post’s Jeff Stein puts the estimate closer to $70 billion a year, still well short of a transformative amount. Former U.S. Treasury economist Ernie Tedeschi calculated that raising the top rate on the top 1 percent of filers to 70 percent would bring in something like $300 billion a year, assuming capital gains were included — a huge amount to be sure, but still well shy of the levels needed to pay for the progressive political agenda backed by Ocasio-Cortez. “Ocasio-Cortez’s tax plan isn’t radical at all,” says Bloomberg’s Noah Smith. “But those who expect the plan to yield a bounty of tax revenue for a Green New Deal or other major spending programs are likely to be disappointed, because the proposed tax hike by itself wouldn’t raise much revenue.”
It’s the overall tax structure — and the political project behind it — that matters most: On its own, raising the top marginal tax rate is unlikely to pay for the significant political changes Ocasio-Cortez is pursuing. But as Bloomberg’s Smith says, politicians looking to transform the America political economy need to address more than just marginal rates: “a dramatic expansion of federal tax revenue would require much more than what Ocasio-Cortez is proposing. It would require an overhaul of the corporate and capital-gains tax systems, higher rates on a much broader range of high earners, and probably wealth taxes as well. It would require a huge amount of political will and a sustained policy-making effort over a number of years.”
Ultimately, the argument over Ocasio-Cortez’s view on marginal tax rates is an argument over political power — an argument that is in some ways just getting started.