Let Them Eat Cake, But Raise Their Taxes

Newly-elected Alexandra Ocasio-Cortez (aka AOC) is the youngest person in Congress. She is becoming very well-known. Last week, she was asked about funding the Green New Deal, the plan to eliminate U.S. carbon emissions and move away from fossil fuels within ten years. This is what she said:

Once you get to the tippie-tops, on your $10 millionth dollar, sometimes you see tax rates as high as 60% or 70%. That doesn’t mean all $10 million dollars are taxed at an extremely high rate. But it means that as you climb up this ladder, you should be contributing more.

Right-wingers immediately screamed that a tax rate that high would be the equivalent of slavery. They didn’t bother to point out that she was referring to the “marginal” tax rate, the percentage at which income over a certain threshold is taxed. That’s very different from taking 60% or 70% of someone’s entire income.

The economist Paul Krugman explains why the 60% or 70% marginal rate is an excellent idea:

The right’s denunciation of AOC’s “insane” policy ideas serves as a very good reminder of who is actually insane.

The controversy of the moment involves AOC’s advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? I mean, who thinks that makes sense? Only ignorant people like … um, Peter Diamond, Nobel laureate in economics and arguably the world’s leading expert on public finance…. And it’s a policy nobody has ever implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.

To be more specific, Diamond, in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rateto be 73 percent. Some put it higher: Christina Romer, top macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates it at more than 80 percent.[

Where do these numbers come from? Underlying the Diamond-Saez analysis are two propositions: Diminishing marginal utility and competitive markets.

Diminishing marginal utility [i.e. the value of something at the margin] is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it.

What this implies for economic policy is that we shouldn’t care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want.

So why not tax them at 100 percent? The answer is that this would eliminate any incentive to do whatever it is they do to earn that much money, which would hurt the economy. In other words, tax policy toward the rich should have nothing to do with the interests of the rich, per se, but should only be concerned with how incentive effects change the behavior of the rich, and how this affects the rest of the population.

But here’s where competitive markets come in. In a perfectly competitive economy, with no monopoly power or other distortions — which is the kind of economy conservatives want us to believe we have — everyone gets paid his or her marginal product. That is, if you get paid $1000 an hour, it’s because each extra hour you work adds $1000 worth to the economy’s output.

In that case, however, why do we care how hard the rich work? If a rich man works an extra hour, adding $1000 to the economy, but gets paid $1000 for his efforts, the combined income of everyone else doesn’t change, does it? Ah, but it does — because he pays taxes on that extra $1000. So the social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort — and conversely the cost of their working less is the reduction in the taxes they pay.

Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue.

And that’s something we can estimate, given evidence on how responsive the pre-tax income of the wealthy actually is to tax rates. As I said, Diamond and Saez put the optimal rate at 73 percent, Romer at over 80 percent — which is consistent with what AOC said.

An aside: What if we take into account the reality that markets aren’t perfectly competitive, that there’s a lot of monopoly power out there? The answer is that this almost surely makes the case for even higher tax rates, since high-income people presumably get a lot of those monopoly rents.

So AOC, far from showing her craziness, is fully in line with serious economic research. (I hear that she’s been talking to some very good economists.) Her critics, on the other hand, do indeed have crazy policy ideas — and tax policy is at the heart of the crazy.

You see, Republicans almost universally advocate low taxes on the wealthy, based on the claim that tax cuts at the top will have huge beneficial effects on the economy. This claim rests on research by … well, nobody. There isn’t any body of serious work supporting G.O.P. tax ideas, because the evidence is overwhelmingly against those ideas.

Increasing marginal rates as income rises is called “progressive” taxation. It’s fair and practical. Republicans are against it, preferring a “flat” tax, where all income is taxed at the same rate. A flat tax let’s the rich keep more of their income. They say it’s fair and simple, but that’s not why they’re for it.

Suckers!

Although Trump voters, on average, had higher incomes than Clinton voters, many of his supporters were and continue to be working class or even poor (and predominantly white, of course). He may have been rich, the epitome of a city slicker, but millions of average people (also known as “suckers”) believed that he’d fight for them.

From Ezra Klein of Vox:

Tax cuts for wealthy Americans have long been the fulcrum atop which Republican Party politics rests. But Donald Trump was supposed to be a different kind of Republican. On 60 Minutes, for instance, Trump said he would raise taxes on “the very wealthy,” and warned that the plan would cost him “a fortune” in higher taxes.

“My whole life I’ve been greedy, greedy, greedy,” Trump said in January of 2016. “I’ve grabbed all the money I could get. I’m so greedy. But now I want to be greedy for the United States.”

The whole Trump pitch was that he was a cutthroat businessman who knew the tricks, had paid off the politicians, had made his billions, and now was going to use his accumulated knowledge to unrig the system, to make it benefit you, the little guy. American politics, he said, was corrupted — by special interests, by self-dealing politicians, by weak negotiators. He was going to fix it all. And many believed him.

In Trump’s inaugural address he said, “What truly matters is not which party controls our government, but whether our government is controlled by the people. January 20, 2017, will be remembered as the day the people became the rulers of this nation again. The forgotten men and women of our country will be forgotten no longer.”

This rhetoric continued after the election: Both Trump’s Treasury secretary and the director of his National Economic Council said the plan wouldn’t cut taxes on the rich. As recently as a few weeks ago, Trump told Senate Democrats, “The deal is so bad for rich people, I had to throw in the estate tax just to give them something.”

In reality, by 2027, 62.1 percent of the tax bill’s benefits go to the top 1 percent, and 42.3 percent of the benefits go to the top 0.1 percent [while millions of lower income taxpayers will see their taxes increase].

The moral of this story is: Never trust a con man when he says he’s on your side.

(But if you insist on trusting a con man, don’t inflict him on the rest of us.)

One of Those Charts

The last time we had a big overhaul of the federal tax code was in 1986. Back then, the poorest 90 percent of the population owned 3 1/2 times as much as the richest 1/10th of 1 percent. I’ll say that again. In 1986, the net worth of the least wealthy 90% of Americans was 3.5 times the net worth of the richest 0.1%.

That’s not the America we live in today. As of 2013, the richest 1/10th of 1 percent owned as much as the poorest 90 percent. To repeat: the net worth of the richest 0.1% was the same as the net worth of the poorest 90%. 

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I’m sure the red line goes even higher now and the blue line goes lower. We should keep this astounding economic inequality in mind when we have the opportunity to vote eleven months from now. That will be eleven months after the Republicans ram through another overhaul of the tax code, one that helps the richest Americans get even richer.

The Truth Still Matters

Will be going to North Dakota today to discuss tax reform and tax cuts. We are the highest taxed nation in the world – that will change.

— Donald J. Trump (@realDonaldTrump) September 6, 2017

But the truth still matters:

oecd tax burdens

The chart includes individual and corporate taxes, as well as local taxes, as reported by the 35-nation Organisation for Economic Co-operation and Development.

For some historical perspective, consider “When the Rich Said No to Getting Richer” by from David Leonhardt of The New York Times:

A half-century ago, a top automobile executive named George Romney — yes, Mitt’s father — turned down several big annual bonuses. He did so, he told his company’s board, because he believed that no executive should make more than $225,000 a year (which translates into almost $2 million today).

He worried that “the temptations of success” could distract people from more important matters, as he said to a biographer, T. George Harris. This belief seems to have stemmed from both Romney’s Mormon faith and a culture of financial restraint that was once commonplace in this country.

Romney didn’t try to make every dollar he could, or anywhere close to it. The same was true among many of his corporate peers. In the early 1960s, the typical chief executive at a large American company made only 20 times as much as the average worker, rather than the current 271-to-1 ratio. Today, some C.E.O.s make $2 million in a single month.

The old culture of restraint had multiple causes, but one of them was the tax code. When Romney was saying no to bonuses, the top marginal tax rate was 91 percent. Even if he had accepted the bonuses, he would have kept only a sliver of them.

The high tax rates, in other words, didn’t affect only the post-tax incomes of the wealthy. The tax code also affected pretax incomes. As the economist Gabriel Zucman says, “It’s not worth it to try to earn $50 million in income when 90 cents out of an extra dollar goes to the I.R.S.”

The tax rates helped create a culture in which Americans found gargantuan incomes to be bizarre.

A few years after Romney turned down his bonuses from the American Motors Corporation, Lyndon B. Johnson signed legislation that lowered the top marginal tax rate to 70 percent. Under Ronald Reagan, it dropped to 50 percent and kept falling. Since 1987, the top rate has hovered between 30 percent and 40 percent.

For more than 30 years now, the United States has lived with a top tax rate less than half as high as in George Romney’s day. And during those same three-plus decades, the pay of affluent Americans has soared. That’s not a coincidence. Corporate executives and others now have much more reason to fight for every last dollar.

And fight they do (it’s called “class warfare”).

Meanwhile, the president* is unnecessarily threatening hundreds of thousands of young people brought to this country by their parents and another extremely dangerous hurricane is on its way. This is further evidence that Republicans are evil and global temperatures are rising, but you already knew that.

Update:  John McCain, the Republican senator who talks a good game but can’t be relied on, has changed his mind about repealing the Affordable Care Act. He now says he’d vote Yes on what is “in may ways … the most radical” repeal bill yet. Further evidence for [see above]. 

2nd Update: McCain now says he would only vote for repeal if the legislation survived committee hearings and was subject to amendments proposed by both sides. That’s not what the 81-year old senator implied earlier today. This latest announcement is good news, because the repeal legislation is extremely unlikely to pass if it’s subject to “normal order” in the Senate instead of being rushed through.