It’s Not a Fringe Benefits Case

It’s blatant fraud and tax evasion. Daniel Shaviro, a professor of taxation at New York University’s School of Law, explains why the case against the former president’s company and its Chief Financial Officer is extremely serious: 

In the days before the July 1, 2021 issuance of the Manhattan District Attorney’s Weisselberg-X Organization indictment, public anticipation was positively underwhelming. It would just be a fringe benefits case, we were told – meaning, a dispute, of a picayune sort that almost never yields criminal charges, regarding whether or not an employee’s use of, say, a company car or apartment yielded taxable income . . . . Everyone does it, we heard, and it shouldn’t be the basis for a criminal fraud charge. What’s more, this ostensibly would just be a New York State or City income tax issue, not federal, thus limiting the scale and monetary significance of the claimed wrongdoing.

Then the indictment dropped, and it turns out that public expectations could scarcely have fallen further short than they were of the magnitude of what was actually being charged. Let me spell out the particulars under several headings:

1. This is no mere fringe benefits case. It is a straight-out fraud case, claiming that the defendants kept double books: phony ones to show the tax authorities, and accurate ones to be hidden from view. The question of whether a given company apartment or car might in theory (with appropriate supporting facts) have been an excludable fringe benefit turns out to be almost completely irrelevant. A better analogy to what is being charged here is the following:

Suppose that your employer pays you monthly, through automatically deposited paychecks that end up being included on your annual W-2. But suppose that each month you could stop by the front office, request an envelope full of cash in unmarked bills, and have your W-2 reduced accordingly. So your true income would be the same as if you hadn’t stopped by, but you’d be reporting less salary. If your employer kept careful records of all the cash it gave you, and also still deducted it all, we would basically have this case. That is far different from simple failure to pay taxes on fringe benefits, which is how the indictment has been widely misunderstood, thanks in part to X’s defense lawyers’ laying the groundwork before the charges were made public on Thursday.

2. It is not just a state and local income tax fraud case. It is also – via New York State fraud, conspiracy, and grand larceny statutes – a federal income tax fraud case. The indictment’s first three and longest counts detail a “scheme to defraud” the federal Internal Revenue Service, including through a “conspiracy” with multiple “overt acts,” and the commission of “grand larceny.” In other words, just as the Manhattan DA could indict someone for committing such crimes (within its jurisdiction) against the likes of you or me, so here it has identified the IRS as the main victim of the defendants’ actions. Indeed, the word “federal” appears thirty times in the Manhattan DA’s 24-page charging document.

Given the facts alleged, it is hard to fathom that the IRS – if it agrees that those facts are true – would not promptly indict the defendants for federal income tax fraud. Failing to bring charges would amount to saying that overt and deliberate tax cheating of the most brazen kind need not be addressed criminally. If a private individual, rather than the Manhattan DA had somehow gathered all of this information and reported it to the IRS, he or she would be in a great position to claim a whistleblower award. And while federal authorities often refrain from piling on, by bringing their own charges when state authorities are already prosecuting a case; the indictment here makes explicit that the fraud was, in the main, directed against the federal government itself.

3. If the Manhattan DA can prove the facts asserted, this is not a trivial case, or one that ordinarily would not be brought, or one that bespeaks political bias, or is just about pressuring a witness whom the DA wants to “turn.” It is unimaginable to me that any prosecutor would not bring these or similar charges under the asserted facts. If the case is proven, the DA will not have been criminalizing political disagreement, as critics complain. Rather, it will have been criminalizing crime – and not a moment too soon from a broader enforcement standpoint, given widespread concerns about plunging enforcement, not just against income tax fraud, but against white-collar crime more generally.

That’s the general overview. However, delving into the details can help to show why all this is so. A clear understanding is best conveyed by turning the indictment’s formal presentation of the charges into more of a straightforward narrative. The rest of this commentary presents the main elements of the story that the indictment tells.

One should keep in mind, of course, that all this is just the Manhattan DA’s case. . . . For convenience, I will set forth the prosecutorial version of what happened without repeating (more than sporadically) that it all still needs to be proven.

4. The true economic deal alleged by the indictment – Weisselberg had a fixed economic deal with the X Corporation. He was to be paid a fixed amount – which, for the years 2011 through 2018, equaled $940,000 annually, comprised of $540,000 denominated as base salary and $400,000 denominated as an end-of-year bonus. Nothing else in the employment agreement and arrangements between the parties that the indictment discusses would change this fixed bottom line. Any supposed “fringe benefit” – and, as we will see, the term really does not fit well here – that the X Organization (through any of its entities) furnished to Weisselberg would be treated as compensation in the company’s internal records, and charged against his $940,000 receipt. Thus, for example, suppose the Organization paid him $50,000 in cash, either directly or through a payment to a third party supplier (including other X entities) of consumer benefits to him. In that case, all else equal, Weisselberg would get $890,000, rather than $940,000, with that lower amount being treated as compensation in issued W-2s and1099s, and by him on his own tax returns. But the Organization’s internal records would still show that he had received $940,000 of compensation, including this $50,000.

5. Fraudulent double bookkeeping – Implementing this scheme required having two inconsistent sets of records: (a) the fake ones for tax reporting that excluded a part of his compensation (under the parties’ financial deal and the company’s secret bookkeeping), and (b) the true accounting records that the company maintained privately. Experts on tax enforcement agree that keeping two sets of books, in this fashion, is “a red flag” and “a classic indication of an overt act of evasion,” often causing the government to have a “slam-dunk case.”

6. Additional overt acts to conceal the fraud – Even in the company’s own ledgers, as distinct from those that were disclosed to relevant tax authorities, Weisselberg took steps to conceal his receipt of benefits. . . . 

7. A large number of the items that the company funded (and then subtracted from Weisselberg’s reported compensation) had no relationship whatsoever to the sort of items that, under appropriate circumstances, might potentially constitute tax-free employee fringe benefits. . . . The following items that the company paid for, on Weisselberg’s behalf, most emphatically do not fit the profile of potentially excludable fringe benefits:

• private school tuition expenses for Weisselberg’s family members
• a Mercedes Benz automobile that was the personal car of Weisselberg’s wife
• unreported cash that Weisselberg could use to pay personal holiday gratuities

(To treat cash as a “fringe benefit” would imply that the term covers all employee compensation. Does this mean that, whenever one is paid with cash off the books and does not report it, the IRS is merely quibbling over fringe benefits? Of course not.)

• personal expenses for Weisselberg’s other homes and an apartment maintained by one of his children; these included such items as new beds, flat-screen televisions, the installation of carpeting, and furniture for his home in Florida
• rent-free lodging and other benefits to a family member of Weisselberg .

In the light of such items, along with the secret double bookkeeping and internal company treatment of all these items as compensation, there are only three possible explanations for calling this a “fringe benefits” case. The first is that one has not read the indictment or otherwise acquainted oneself with the pertinent facts. The second is one that is ignorant, not just of extremely basic aspects of federal and state income tax law, but also of common English language usage. Calling bundles of cash and the provision of flat screen televisions in employees’ vacation homes “fringe benefits” – especially when they are not extra pay, but replace ordinary paycheck salary, dollar for dollar – would appear to leave no employee compensation outside the term’s potential scope. The third is that one has decided to misinform one’s audience.

8. Fraudulent mischaracterization of employee compensation, supported by deceptive bookkeeping – The company also reported Weisselberg’s annual end-year payments ($400,000 for the years 2011-2018) as non-employee compensation, using Form 1099 rather than the W-2 that is used for salary. He relied on this mischaracterization to make deductible annual contributions out of these amounts to a Keogh plan, which is a tax-deferred pension plan that one can deductibly fund by using self-employment income, but not employee wages. To help support this characterization (which the indictment asserts Weisselberg knew was false), end-year payments would be made by X Organization entities of which he was not an employee, such as the Mar-a-Lago Club and Wollman  Rink Operations LLC. This creation of a false paper trail – since he had not directly performed services for these entities supporting the receipt of such payments from them, even as an independent contractor – fits the alleged pattern of not merely taking incorrect tax positions, but engaging in intentionally misleading overt acts in support of a conspiracy to defraud. It also arguably shows consciousness of guilt.

9. Evasion of New York City income tax by falsely denying local residence status – The indictment states that, from 2005 through 2013, Weisselberg and the other corporate defendants acted to “conceal his status as a New York City resident” and thus “enable[d him] to avoid the payment of New York City income taxes”. It further adds that he “spent most of his days each year in New York City, working in the X Organization offices at X Tower. He was a New York City resident, and knew that he was a New York City resident, but falsely claimed to his tax preparer and to the tax authorities that he was not a New York City resident” . . . 

It is a widely-known fact among New York-area taxpayers – and not just those with specific tax and accounting knowledge, like Weisselberg himself – that, if one has an apartment in New York City (as he did) and is in the City for at least a part of more than 183 days in a given year, then one counts for that year as a City resident. This is not an issue that turns on any broader (or other) facts and circumstances. Under the indictment’s stated facts, therefore, Weisselberg unambiguously was a New York City resident for all of the years from 2005 through 2013, based on an objective black-letter rule that is hardly arcane or obscure.

10. What was X’s role in all this? . . . There is little direct discussion of what X himself did or knew personally in relation to the facts asserted in the indictment. If X is subsequently indicted by the DA in connection with the crimes alleged here or anything else, his conviction would require proof in court, beyond a reasonable doubt, of his requisite criminal actions and intent. In the courtroom of public discussion and debate, however, any claim that the crimes asserted in the indictment could have occurred without his participation and knowledge may be viewed by many as begging credulity [i.e. he’s as guilty as hell].

What the Hell Is Private Equity?

What is private equity? According to Investopedia, “private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies”. This means that a private equity firm puts its money directly into target companies, either companies that are themselves privately owned (like Koch Industries) or ones that sell publicly traded stock (like General Motors and I.B.M.).

The people who run a private equity firm are able to do this because they have vast sums of money, either their own or their partners’ or money they’ve collected from their customers (i.e., investors who pay the private equity firm to manage their money, the same way investors in a mutual fund company pay management fees to the mutual fund company). 

Sometimes a private equity firm invests so much in a target company that they control its finances. This allows them to sell the most profitable parts of the target company or saddle it with enormous amounts of debt (I don’t know how, but private equity firms somehow suck profits out of companies they control without ever having to pay back the debt they’ve taken on).

This brings us to an article in The New York Times about how private equity firms avoid taxes, not always legally:

Private equity has conquered the American tax system.

The industry has perfected sleight-of-hand tax-avoidance strategies so aggressive that at least three private equity officials have alerted the Internal Revenue Service to potentially illegal tactics, according to people with direct knowledge of the claims and documents reviewed by The New York Times. The previously unreported whistle-blower claims involved tax dodges at dozens of private equity firms.

But the I.R.S., its staff hollowed out after years of budget cuts, has thrown up its hands when it comes to policing the politically powerful industry.

While intensive examinations of large multinational companies are common, the I.R.S. rarely conducts detailed audits of private equity firms, according to current and former agency officials.

Such audits are “almost nonexistent,” said Michael Desmond, who stepped down this year as the I.R.S.’s chief counsel. The agency “just doesn’t have the resources and expertise.”

One reason they rarely face audits is that private equity firms have deployed vast webs of partnerships to collect their profits. Partnerships do not owe income taxes. Instead, they pass those obligations on to their partners, who can number in the thousands at a large private equity firm. That makes the structures notoriously complicated for auditors to untangle.

Increasingly, the agency doesn’t bother. People earning less than $25,000 are at least three times more likely to be audited than partnerships, whose income flows overwhelmingly to the richest 1 percent of Americans.

The consequences of that imbalance are enormous.

By one recent estimate, the United States loses $75 billion a year from investors in partnerships failing to report their income accurately — at least some of which would probably be recovered if the I.R.S. conducted more audits. That’s enough to roughly double annual federal spending on education.

It is also a dramatic understatement of the true cost. It doesn’t include the ever-changing array of maneuvers — often skating the edge of the law — that private equity firms have devised to help their managers avoid income taxes on the roughly $120 billion the industry pays its executives each year.

Private equity’s ability to vanquish the I.R.S., Treasury and Congress goes a long way toward explaining the deep inequities in the U.S. tax system. When it comes to bankrolling the federal government, the richest of America’s rich — many of them hailing from the private equity industry — play by an entirely different set of rules than everyone else.

The result is that men like Blackstone Group’s chief executive, Stephen A. Schwarzman, who earned more than $610 million last year, can pay federal taxes at rates similar to the average American.

Lawmakers have periodically tried to force private equity to pay more, and the Biden administration has proposed a series of reforms, including enlarging the I.R.S.’s enforcement budget and closing loopholes. . . . 

The private equity industry, which has a fleet of almost 200 lobbyists and has doled out nearly $600 million in campaign contributions over the last decade, has repeatedly derailed past efforts to increase its tax burden.

“If you’re a wealthy cheat in a partnership, your odds of getting audited are slightly higher than your odds of getting hit by a meteorite,” Senator Ron Wyden, the committee’s chairman, told Mr. Rettig at the hearing. “For the sake of fairness and for the sake of the budget, it makes a lot more sense to go after cheating by the big guys than focus on working people.”

Yet that is not what the I.R.S. has done.

Private equity firms typically borrow money to buy companies that they see as ripe for turnarounds. Then they cut costs and resell what’s left, often laden with debt. The industry has owned brand-name companies across nearly every industry. Today its prime assets include Staples, Petco, WebMD and Taylor Swift’s back music catalog.

The industry makes money in two main ways. Firms typically charge their investors a management fee of 2 percent of their assets. And they keep 20 percent of future profits that their investments generate.

That slice of future profits is known as “carried interest.” The term dates at least to the Renaissance. Italian ship captains were compensated in part with an interest in whatever profits were realized on the cargo they carried.

The I.R.S. has long allowed the industry to treat the money it makes from carried interest as capital gains, rather than as ordinary income.

For private equity, it is a lucrative distinction. The federal long-term capital gains tax rate is currently 20 percent. The top federal income tax rate is 37 percent.

The loophole is expensive. Victor Fleischer, a University of California, Irvine, law professor, expects it will cost the federal government $130 billion over the next decade.

Back in 2006, Mr. Fleischer published an influential article highlighting the inequity of the tax treatment. It prompted lawmakers from both parties to try to close the so-called carried interest loophole. The on-again, off-again campaign has continued ever since.

Whenever legislation gathers momentum, the private equity industry — joined by real estate, venture capital and other sectors that rely on partnerships — has pumped up campaign contributions and dispatched top executives to Capitol Hill. One bill after another has died, generally without a vote.

Unquote.

There’s much more in the article, including how these guys pretend they aren’t collecting management fees (which are taxable as regular income) by disguising them as capital gains (which are taxed less). But you get the idea.

Roads, Taxes and Rationality

There’s no shortage of news being made and problems to be addressed, but the world seems a bit quite these days. Maybe the president has something to do with it:

Biden’s words . . . have been counted along with his on-camera appearances and total one-third of those notched up by the previous president at the equivalent stage (The Guardian).

It clearly helps that there are rational people in charge of the federal government for a change, “rational” in the sense that they’re trying to fix problems instead of ignoring them or making them worse. 

An excellent example is the problem of America’s “crumbling infrastructure”. The two words, “crumbling” and “infrastructure”, have been tied together for decades, like “manicured lawns”, “well-heeled lobbyists”, “potent symbols” and “hot topics”. Everybody agrees the country’s roads, bridges, dams, school buildings, electrical grid, etc. need work and it will cost a lot of money to modernize them. I just typed in “infrastructure” and got:

The cost to fix America’s crumbling infrastructure? Nearly $2.6 trillion, engineers say (CNN).

So it isn’t a surprise that Biden is announcing a big infrastructure plan tomorrow (unlike his predecessor, the orange guy, who kept promising a tremendous infrastructure plan to go along with his miraculous health insurance plan, neither of which ever materialized.)

Nor is it a surprise that Republicans won’t want to pay for it. From the Washington Post’s “Plum Line” blog:

New details are emerging about the massive infrastructure plan that Democrats will present this week, and it poses a problem for Republicans. This is exactly kind of government spending voters from both parties support — every member of Congress would happily have a new bridge in their district.

But if it passes, it will be another victory for President Biden. So Republicans have to find a way to convince voters it’s a terrible idea, which they’ll attempt through a series of misleading arguments.

Here’s the latest on the package, from The Post:

Biden’s plan will include approximately $650 billion to rebuild the United States’ infrastructure, such as its roads, bridges, highways and ports, the people said. The plan will also include in the range of $400 billion toward care for the elderly and the disabled, $300 billion for housing infrastructure and $300 billion to revive U.S. manufacturing. It will also include hundreds of billions of dollars to bolster the nation’s electric grid, enact nationwide high-speed broadband and revamp the nation’s water systems to ensure clean drinking water, among other major investments, the people said.

Those all seem like worthy goals. So how will Republicans argue against them?

One way will revolve around fearmongering about deficits and tax hikes. Another will seek to cherry-pick from the package to portray it as stuffed with wasteful boondoggles.

On the first, Biden is expected to ask congressional Democrats to roll back parts of his predecessor’s tax cuts for the wealthy and corporations, and to increase taxes on profits that corporations shelter offshore.

And Senate Minority Leader Mitch McConnell (R-Ky.) is already balking. “If you want to do an infrastructure bill, let’s do an infrastructure bill,” is McConnell’s latest line. “Let’s don’t turn it into a massive effort to raise taxes on businesses and individuals” [i.e. corporations and rich people].

The Republican game runs as follows. They say they support infrastructure repair in principle (which is true of some). But, they add, they don’t support paying for it either by driving up the deficit or with tax hikes that will kill jobs (as McConnell suggested).

Never mind that Republicans exploded the deficit with the very tax cuts for the rich and corporations that Democrats want to partly reverse, or that Republicans are pretending doing this would raise taxes on workers, or that the claim that tax hikes kill jobs has been perpetually proven wrong. . . .

Meanwhile, you will surely hear the name “Solyndra” bandied about, in reference to what happened the last time a Democratic administration boosted green energy infrastructure (an even bigger component of Biden’s plan).

Republicans are already making the case that last time millions in taxpayer dollars were squandered on green energy jobs that never materialized. They are road-testing a new slogan about what’s coming: “Solyndra Syndrome.”

But that actually points to how Democrats should respond to this attack. Because the truth is very different from what Republicans would have you believe.

Solyndra was indeed a failure: As part of a federal program to support promising companies, the Obama administration gave a $535 million loan to the firm. But their solar panel technology struggled to compete against low-cost panels from China, and the company eventually went bankrupt.

But the whole point of the loan program was to take risks, in the knowledge that some of them wouldn’t work out. And other loans paid off spectacularly well.

You may have heard of another up-and-coming green tech company that got a $465 million loan at around the same time, enabling it to start making passenger cars. It’s called Tesla. It paid back its loan with interest, and today has more than 70,000 employees.

Republicans spent years trying to turn the Solyndra failure into a scandal. What they didn’t mention is that despite the loss the government took on it, the program that funded that loan quickly turned a profit, eventually earning billions.

So that part of the Obama Recovery Act was a success, even though Republicans convinced many people it was a failure. The reality tells the opposite story, and Democrats should say so.

Beyond all that, . . . Democrats have a good way to call the Republicans’ bluff: Renew the push for a boost in funding for the Internal Revenue Service, so it can start hauling in the huge piles of revenue that will likely to go uncollected in coming years — much from the wealthy and corporations.

Tax experts say that due to IRS budget cuts and resulting lax enforcement, as much as $7.5 trillion in revenue could go uncollected over the next decade, a good deal of it from wealthy actors who are well resourced to evade payments. They also say netting even a fraction of that could bring in gobs of new revenue.

Sen. Ron Wyden (D-Ore.), the chairman of the Finance Committee, says Democrats should renew this push, tied to the debate over infrastructure, by arguing for more funding for IRS enforcement, and for reforms improving its efficacy:

The absolute bare minimum Republicans should get behind is ensuring the IRS has resources and trained staff to collect taxes that are currently owed. They won’t have any credibility if their position is that not only can there be no new revenue, but we also can’t do significantly more to collect revenue that’s owed.

Unquote.

Republicans won’t have any credibility? That’s never bothered them before.

Cutting Taxes for the Rich Simply Helps the Rich (Duh)

Some counterintuitive ideas are fine. Others counterintuitive ideas are stupid (and self-serving).

A counterintuitive idea popular among conservatives is that helping the rich makes them productive while helping the poor makes them lazy. Another is that cutting taxes on the rich increases what the government collects in taxes. Sure it does!

From CBS News:

Tax cuts for the wealthy have long drawn support from conservative lawmakers and economists who argue that such measures will “trickle down” and eventually boost jobs and incomes for everyone else. But a new study from the London School of Economics says 50 years of such tax cuts have only helped one group — the rich.

The new paper by [two British economists] examines 18 developed countries — from Australia to the United States — over a 50-year period from 1965 to 2015. The study compared countries that passed tax cuts in a specific year, such as the U.S. in 1982 when President Ronald Reagan slashed taxes on the wealthy, with those that didn’t, and then examined their economic outcomes. 

Per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn’t, the study found. 

But the analysis discovered one major change: The incomes of the rich grew much faster in countries where tax rates were lowered. Instead of trickling down to the middle class, tax cuts for the rich may not accomplish much more than help the rich keep more of their riches and exacerbate income inequality, the research indicates.

“Based on our research, we would argue that the economic rationale for keeping taxes on the rich low is weak” said a co-author of the study. “In fact, if we look back into history, the period with the highest taxes on the rich — the postwar period — was also a period with high economic growth and low unemployment.”

Unquote.

But not to worry, conservatives! Facts have a well-known liberal bias.

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.