The real purpose of the 70% marginal tax proposal


Alexandria Ocasio-Cortez’s proposal to raise the marginal income tax rate for incomes over $10 million to 70% has sparked a huge amount of interest in general and also alarm among the wealthy. Much of the discussion has focused on how much revenue it might raise. But as Vanessa Williamson writes, the main purpose of such a tax is not to raise revenue but to reduce inequality, and that those who focus on the former are missing the point.

Again, the revenue question is the wrong question. Not because talking about revenue plays into a Republican strategy of deeply hypocritical deficit fear mongering¬¬¬¬ — though it does. Not because extracting money from rich people is easy; there are serious technical questions about how to implement taxes on the very wealthy. The problem with using revenue to justify progressive taxation is that over time, an effective progressive tax system should actually raise less and less money.

Progressive taxation should work as a corrective tax, like tobacco taxes or a carbon tax. Sure, tobacco taxes raise some revenue for the states. But their primary purpose is to curb smoking. While a carbon tax could produce a lot of government revenue, the real point is to limit global warming pollution. In essence, corrective taxes try to put themselves out of business; if tobacco tax revenues decline because people quit smoking, or if carbon taxes stop rolling in because the economy becomes fossil-free, that is victory, not defeat.

Taxes on the wealthy discourage a different societal ill: exploitative capitalism. Progressive tax policy is a powerful corrective to economic inequality and wealth concentration. As economists Thomas Piketty and Emmanuel Saez concluded in their seminal paper on U.S. income inequality, “steep progressive income and estate taxation” helped prevent the accumulation of immense fortunes in the middle of the 20th century. In cross-national data, moreover, there is a “strong negative correlation between top tax rates and top 1% income share.” In other words, where top tax rates are higher, the income distribution is more egalitarian – not just post-tax, but even before taxes are taken out.

That’s because progressive taxes blunt the incentives for wealthy people to overpay one another and exploit the less privileged.

The democratic argument was once central to the case for progressive taxation. In 1910, Theodore Roosevelt called for progressive income and estate taxes because, “unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power.” The goal of progressive taxation, for Roosevelt, was “to change the conditions which enable these men to accumulate power which it is not for the general welfare that they should hold or exercise.”

Early proponents of progressive tax policy knew that it was not just a revenue source.

This is important to bear in mind as the debate is only going to get more heated.

It turns out that even at Davos, the idea of taxing the rich more heavily found favor. Watch this powerful video clip from a panel that was held there. It deserves to go viral. (Bonus: Cameo reaction shot of Jane Goodall and her plush monkey.)

Comments

  1. flex says

    This was precisely the point I was going to make the previous thread about a competition to see how much society can reduce inequality.

    There are several ways to reduce inequality but quick methods, like revolutions, have a less than stellar track record. Economic change in a society which happens too fast tends to irritate large sections of society. Which leads to discontent and counter-revolutions where authoritarians are welcomed as being able to stabilize society. We know that the results of relying on authoritarians to stabilize society also leads to greater inequality, just with different groups. Meet the new boss, same as the old boss. And regardless of the wisdom of The Who, we continually get fooled by them.

    What does work is to change the incentives of society in a fashion which people, generally, can accept as a change which doesn’t really affect them (unlike revolutions or dictatorships) but creates the impression of increased fairness. The rise in inequality since the mid-1970’s can be shown to correlate to the reduction of the top marginal tax bracket. The stagnant middle-class wages in comparison to inflation over the same period can also be shown to correlate. As can the incredible rise in middle-class incomes post-war when the top marginal rate was 90%. This kind of argument will resonate with people, I’ve used it myself for years and the reception has generally been positive.

    But what also must be said is that while the inequality has been rising for 50 years, it took the 30 years between WWII and 1970’s of high top marginal tax rates to reduce inequality. I haven’t had the time or energy, but I think it would be a fascinating project to dig through old SEC filings for CEO pay from the 1930’s to 1990’s and track executive salaries. My suspicion is that once the 90% top marginal rate was imposed, executives voluntarily capped their pay at that level. And that when the top marginal rate dropped to the same level as one of their workers in the 1980’s under Reagan, that voluntary cap was lifted. That money (which is now funneled to executive boards) was spent on raising salaries, providing company health care to dependents, research and development, etc. The money was spent on company growth, and even then there was so much money that the company employees got a larger part of the pie. (I have a suspicion is that the lack of a national single-payer health care system is related to the amount of money companies were willing to pay to provide health care to their employees in the 1950’s, and ultimately related to the high top marginal tax rate. There are some negative effects of a high top marginal rate when enough money is floating around for corporate benefit plans.)

    As you indicate, a high top marginal rate is not a money-raising action for the government. It is a disincentive for anyone, CEOs, lawyers, sports figures, or team owners, anyone who can manage their own salary level, to set their salary at a level high enough to reach that rate. The results of a high top marginal tax rate is that more money is available for other activities. This includes providing the middle-class with high income, who will then turn around and spend it. The middle-class cannot really manage their salary level, that’s largely market determined.

    Wealth is a problem, but it’s a problem which will correct itself over time if the income stream to wealthy people is reduced. Wealthy people will spend it. It may take a couple generations, but to avoid a generation of revolution and/or dictatorship, it’s probably a better choice.