In These Times
January 18, 2019
By Mark Engler and Andrew Elrod
To combat inequality and oligarchy, we need to tax
the accumulated wealth of the billionaire class, not just income.
Last week, when 60 Minutes aired an interview with newly sworn-in Rep. Alexandria Ocasio-Cortez, the freshman New York congressperson caused an uproar with what, by Washington standards, seemed a rather immodest proposal. Asked whether an expansion of public investment in green technologies would require raising taxes, she cited history.
“You look at our tax rates back in the 60s… [and] on your 10 millionth dollar, sometimes you see tax rates as high as 60 or 70 percent,” Ocasio-Cortez explained. Given that a 70 percent tax on the wealthy would be nearly double the current rate on top earners, CBS’s Anderson Cooper responded with disbelief. “What you are talking about…” he said, “is a radical agenda compared to the way politics is done now.”
Cooper was not the only one to express skepticism. While conservatives were predictably apoplectic, even ranking Democrats on the House Ways and Means Committee, responsible for drafting the tax code, were incredulous. Texas Democrat Lloyd Doggett described Ocasio-Cortez’s suggestion as “a little over the top.” New Jersey Democrat Bill Pascrell dismissed it as “comical.”
In fact, Ocasio-Cortez’s comments represent good policymaking. Both looking abroad and in terms of the United States’ own history, there is strong evidence to support the benefits of higher taxes on the super-rich. But more than looking at her off-handed response as an actual proposal or a final policy goal, her comments should serve as an opening to a broader conversation.
Yes, we should be asking what is the optimal tax rate on the wealthy for an expansion of public investment in necessary goods and services. But we should also consider a more fundamental question: Do we really want to live in a society in which those at the top can make hundreds or even thousands of times as much money as those toiling at the bottom?
Taxing the rich is popular—and makes good economic sense
In the fallout from Ocasio-Cortez’s interview, economist and New York Times columnist Paul Krugman was quick to point out that her view of optimal tax rates was far from controversial.
A flight of prominent academics, including Nobel laureate Peter Diamond, whom Krugman describes as “arguably the world’s leading expert on public finance,” have concurred that a top tax rate of over 70 percent would be entirely reasonable. “Some put it higher,” Krugman noted. “Christina Romer, top macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates [the optimal rate for the top tax bracket] at more than 80 percent.”
America indeed long had tax rates on the rich that reached the levels Ocasio-Cortez proposed or higher, while the nation experienced massive economic expansion. In fact, she understated the rates from the past: For two decades after World War II, until 1964, the marginal tax rate on the highest bracket hovered around 91 percent.
For a married couple in 1960, that applied to income earned above $400,000, the equivalent of approximately $3 million today. Yet this was the period in which the United States economy boomed most dramatically, when college students could reliably expect both a new car and a home mortgage after graduation. The annual growth rate in GDP reached levels as high as 7 and 8 percent.
There are also international precedents to suggest that taxing the super-rich yields substantial public benefits. Sweden has taxes on high incomes comparable to Ocasio-Cortez’s 70 percent proposal, with current rates of economic growth and labor-force participation greater than in the United States. Before Margaret Thatcher’s Tory government cut taxes on the wealthy in the 1980s, the United Kingdom long maintained top rates in excess of 75 percent, with additional surcharges on investment income.
While, like in the United States, inequality has soared in Britain in recent decades (the tax rate on income earned above £150,000, or about $200,000, is now 45 percent) its history of higher rates was part of the broader arsenal of social-democratic policies aimed at making the country a more fair and just place for its residents. These include public hospitals accessible to all, just as primary and secondary schools are in the United States. They also include at least 28 days of guaranteed paid vacation for all workers.
In contrast, there is no economic consensus on the upside of cutting top tax rates. The historical evidence is unambiguous: Over the past 40 years, slashing taxes on the rich has had no discernable positive effect on investment or innovation. On the contrary, both have slowed.
“Right now the main economic puzzle in macroeconomics is that corporate profits are very, very high,” says Marshall Steinbaum, an economist and Research Director at the Roosevelt Institute. “At the same time, corporate investment and innovation [are] at all-time lows. Productivity growth is stagnant.” Despite repeatedly implementing the tax policy prescribed by right-wing thinkers, the United States has failed to reap the supposed benefits.
Part of the Republican counterattack on Ocasio-Cortez has involved attempting to scare the public with the idea that, under her plan, everybody’s income will be taxed at the same, higher level. But, as Ocasio-Cortez herself has repeatedly explained, that’s not how marginal rates work. Even for someone making $12 million per year, the 70 percent tax would only kick in on the last $2 million. Your first $10 million would be taxed at lower rates.
The idea of applying such a levy on the extreme income of the wealthy is also very popular. A recent Hill-HarrisX survey shows that 59 percent of registered voters support Ocasio-Cortez’s proposal of raising the top marginal tax rate to 70 percent—with 45 percent of Republican voters saying they favor the concept.
Toward a more equal society
Higher taxes on the rich could go a long way towards creating higher-quality public schools, free higher education, universal healthcare and a Green New Deal. According to the Washington Post, Ocasio-Cortez’s hike on the top tax bracket could generate $72 billion per year in revenue.
Some progressives—notably advocates of Modern Monetary Theory, a brand popularized by the economists Stephanie Kelton and L. Randall Wray—dispute the necessity of such funding. They argue the government need not be preoccupied with raising taxes, as it can comfortably borrow to stimulate the economy and make socially productive investments. But a higher tax on top earners is not just about generating revenue. Rather, taxes on the ultra-wealthy can be seen as goods in their own right, as tools for fighting runaway income inequality.
There is a surfeit of reasons for proactively combating inequality. Though economists debate the reasons for the effect, there is widespread consensus that increasing inequality contributes to slower growth in the economy.
Inequality fuels negative public health outcomes, and, among psychologists, it is now considered a causal factor in aggregate rates of mental illnesses and personality disorders. It also fuels social distrust. Asked whether “most people can be trusted,” 60 to 65 percent in more equal countries agree, compared to 20 percent in more unequal societies. And a billionaire class risks turning democracy into oligarchy.
In this context, proposals for higher taxes on the super-rich—even those that would use the tax code to create a de facto maximum income—might have socially beneficial consequences that have little to do with government revenue.
For one, raising taxes on the rich can help to lessen their disproportionate political power. Curtailing incomes over $10 million per year will help curb the ability of the rich to buy influence through campaign contributions, dark money issue campaigns, lobbying, and nonprofits aimed at undermining unions, attacking environmental regulations, or promoting further tax cuts.
High marginal rates can also change labor relations, altering business incentives and shifting bargaining dynamics in American workplaces. “We know the things that rich people do in order to be rich come at the expense of everybody else,” Steinbaum argues. He imagines a situation in which the tax code effectively capped the earnings of multi-millionaires: “In a labor-bargaining context,” Steinbaum says, “if the boss’s marginal tax rate is 100 percent, he’s going to care less about outsourcing labor, about squeezing workers, about doing everything that bosses do in order to squeeze a marginal dollar out of their workforce, or out of their supply chain, or out of any other economic stakeholder they deal with. So the point of the tax policy is to equalize bargaining power throughout the economy.”
While higher income taxes would help to address inequality, abolishing the ultra-rich altogether would require measures to address the vast concentrations of wealth that have already amassed.
“Ideally, we should be taxing wealth as well as income,” says J.W. Mason, an economist at John Jay College. “We do tax the wealth of middle class people—in the form of property taxes on people’s homes—but we don’t tax the wealth of the rich, which is more likely to be in a portfolio of financial assets. If you are super-rich, although you might pay taxes on capital gains or inheritance, you don’t pay any taxes on your financial assets simply by virtue of owing them,” Mason explains.
In contrast, he says, “France has a wealth tax that has existed since the French Revolution”—and indeed Emmanuel Macron’s move to cut it was one of the factors that fueled the recent Yellow Vest protests.
“Concentration of wealth may be even more problematic than the concentration of income, in terms of the political power it gives you and what it does to perpetuate inequality from generation to generation,” Mason contends.
Ultimately, finding an optimal tax rate for the super-rich is a moral and political issue as much as an economic one. In a country where the influence of the billionaire class is posing an increasing challenge to democracy, Ocasio-Cortez’s proposal for restoring the kind of taxes that existed through America’s postwar boom should be seen as but a sensible starting point on the path to more far-reaching change.