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Alexandria Ocasio-Cortez’s tax hike idea is not about soaking the rich

Gabriel Zucman, Assistant professor of economics | January 22, 2019

This article was written by UC Berkeley economics professors Gabriel Zucman and Emmanuel Saez. It first appeared in the New York Times.

stock images of a calculator and bills

Two UC Berkeley professors argue a new tax proposal is actually about curtailing inequality and saving democracy. (Courtesy image Sole Treadmill)

Alexandria Ocasio-Cortez has kick-started a much-needed debate about taxes. But the debate, so far, has been misplaced. It’s obvious that the affluent — who’ve seen their earnings boom since 1980 while their taxes fell — can contribute more to the public coffers. And given the revenue needs of the country, it is necessary.

But that’s not the fundamental reason higher top marginal income tax rates are desirable. Their root justification is not about collecting revenue. It is about regulating inequality and the market economy. It is also about safeguarding democracy against oligarchy.

It has always been about that. Look at the history of the United States. From 1930 to 1980, the top marginal income tax rate averaged 78 percent; it exceeded 90 percent from 1951 to 1963. What’s important to realize is that these rates applied to extraordinarily high incomes only, the equivalent of more than several million dollars today. Only the ultrarich were subjected to them. In 1960, for example, the top marginal tax rate of 91 percent started biting above a threshold that was nearly 100 times the average national income per adult, the equivalent of $6.7 million in annual income today. The merely rich — the high-earning professionals, the medium-size company executives, people with incomes in the hundreds of thousands in today’s dollars — were taxed at marginal rates in a range of 25 percent to 50 percent, in line with what’s typical nowadays (for instance, in states like California and New York, including state income taxes).

That few people faced the 90 percent top tax rates was not a bug; it was the feature that caused sky-high incomes to largely disappear. The point of high top marginal income tax rates is to constrain the immoderate, and especially unmerited, accumulation of riches. From the 1930s to the 1980s, the United States came as close as any democratic country ever did to imposing a legal maximum income. The inequality of pretax income shrunk dramatically.

The view that excessive income concentration corrodes the social contract has deep roots in America — a country founded, in part, in reaction against the highly unequal, aristocratic Europe of the 18th century. Sharply progressive taxation is an American invention: The United States was the first country in the world, in 1917 — four years after the creation of the income tax — to impose tax rates as high as 67 percent on the highest incomes. When Representative Ocasio-Cortez proposes a 70 percent rate for incomes above $10 million, she is reconnecting with this American tradition. She’s reviving an ethos that Ronald Reagan successfully repressed, but that prevailed during most of the 20th century.

And she’s doing so at a time when there is an emergency. For just as we have a climate crisis, we have an inequality crisis. Over more than a generation, the lower half of income distribution has been shut out from economic growth: Its income per adult was $16,000 in 1980 (adjusted for inflation), and it still is around $16,000 today. At the same time, the income of a tiny minority has skyrocketed. For the highest 0.1 percent of earners, incomes have grown more than 300 percent; for the top 0.01 percent, incomes have grown by as much as 450 percent. And for the tippy-top 0.001 percent — the 2,300 richest Americans — incomes have grown by more than 600 percent.

Just as the point of taxing carbon is not to raise revenue but to reduce carbon emissions, high tax rates for sky-high incomes do not aim at funding Medicare for All. They aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.

Of course, there are many policies — from the enforcement of antitrust laws to a broader access to education; from the regulation of intellectual property to better corporate governance — that can contribute to curbing inequality in the years to come. And government transfers, whether in the form of income support for families or public health insurance, have a critical role to play.

But redistribution alone will not be enough to address the inequality challenge of the 21st century. All societies that have successfully tamed inequality have done so mostly by curbing the concentration of pretax income — the inequality generated by the markets — for the simple reason that extreme market inequality undermines the very possibility of redistribution. Tolerating extreme inequality means accepting that it’s not a gross policy failure, not a serious danger to our democratic and meritocratic ideals — but that it’s fair and just and natural. It produces its own self-justifying ideology. It vindicates the “winners” of world markets. But vindicated winners, sure of their own legitimacy, seldom share much of their “just deserts” with the rest of society.

An extreme concentration of wealth means an extreme concentration of economic and political power. Although many policies can help address it, progressive income taxation is the fairest and most potent of them all, because it restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else.

A common objection to elevated top marginal income tax rates is that they hurt economic growth. But let’s look at the empirical evidence. The United States grew more strongly — and much more equitably — from 1946 to 1980 than it has ever since. But maybe in those years the United States, as the hegemon of the post-World War II decades, could afford “bad” tax policy? Let’s look then at Japan in 1945, a poor and war-devastated country. The United States, which occupied Japan after the war, imposed democracy and a top marginal tax rate of 85 percent on it (almost the same rate as at home — 86 percent in 1947). The goal was obviously not to generate much revenue. It was to prevent, from that tabula rasa, the formation of a new oligarchy. This policy was applied for decades: In 1982, the top rate was still 75 percent. Yet between 1950 and 1982, Japan grew at one of the fastest rates ever recorded (5.1 percent a year per adult on average), one of the most striking economic success stories of all time.

Contrast Japan in 1945 with Russia in 1991. When Communism fell, Russia was also a poor country, with income and life expectancy well below that of Western economies. In lieu of 85 percent top rates, however, Russians got fast privatization and a top tax rate of 30 percent — again modeled on what was prevailing in the United States at the time (31 percent in 1991). That rate was replaced in 2001 by an even lower flat rate of 13 percent. That shock therapy created a new oligarchy, led to negative income growth for the bottom half of the population, fostered a general discontent with democracy and produced a drift toward authoritarianism.

Progressive income taxation cannot solve all our injustices. But if history is any guide, it can help stir the country in the right direction, closer to Japan and farther from Putin’s Russia. Democracy or plutocracy: That is, fundamentally, what top tax rates are about.

Comments to “Alexandria Ocasio-Cortez’s tax hike idea is not about soaking the rich

  1. A good diverse perspective could be gained by reading Thomas Sowell, no lightweight in the field of Econic thought. Wealth is credit given by those in society who have granted that credit in the form for dollars for goods and services provided to them. The fact that someone is wealthy is evidence that they, or their benefactors, provided more than they consumed. Whether it’s a major league baseball player, a titan of industry, a gifted artist or a trader on wall street, people make money because they are producing things that other people are willing to pay for. The products and services provided may be virtuous, such as food, housing, transportation or medicine, or they may lack virtue, examples being crack cocaine or cigarettes. Either way, those goods and services are provided to meet the demand of people. This is not high level theory. It’s Economics 101. The only exception is when credit in the form of dollars or goods recieved were gained through fraud or theft. I’m not rich by any means, but I appreciate those who have gained enormous wealth through the provision of goods and services to the rest of us.

  2. When I was studying economics I got acquainted with the Laffer curve. It made it clear that the lack of taxation would result in a lack of income to the state budget. On the other hand, too much taxation will result in a similar situation. More and more people will not be able to work to give the country most of their income in the form of tax. Governments must have the ability to forecast the effects of their decisions. A very interesting article. Greetings from Poland.

  3. “. . . given the revenue needs of the country, it is necessary. But that’s not the fundamental reason higher top marginal income tax rates are desirable. Their root justification is not about collecting revenue. It is about regulating inequality and the market economy. ” OMG, where do I start???

    Let me begin with “the revenue needs of the country, it is necessary.” The USA has a crushing national debt, that we can agree on, that was greatly contributed to by President Obama’s $831Billion “stimulus” bill that was supposed to reduce unemployment below 8% from over 10% (oops, it did not move unemployment at all). President Obama, the first Socialist President, Increased the Nat’l Debt from $10 trillion @68% of GDP, to $19.5 trillion @ 104% GDP. President Obama managed to dig our deficit hole almost twice as deep as all previous presidents, 95% deeper in debit. From a purely economic point of view this is what “Socialism light” got us, imagine what “Maxi Socialism” could accomplish.

    Let me respond to your second point, ” It is about regulating inequality and the market economy. ” If I understand your position, and I think I do, you believe that a government beaurocrate would be more knowledgeable, more compassionate, more efficient at spending confiscated wealth than the people who created the wealth, the products, and the jobs. Bill Gates, Steve Jobs, & Mark Z. earned their massive wealth creating products and services that people chose to buy, or in the case of Face Book, used for “free”. NO major invention that improved the standard of living of the average person came out of Russia, China, Cuba, or any other Government controlled economy in the last fifty years. History is not on your side. France tried a 70+ income tax rate earlier this decade and had to reverse it two years later because of a flight of wealth and “brain drain”. France’s current President described the economic result as: “Cuba without the sun”. We see this same phenomenon between high tax states and low tax states. People with wealth have options where to live. The people who ultimately get stuck paying for the Socialist righteous dreams are the Middle Class Working Families. When USA had a 70+ tax rate (90% in 1960) almost no one paid it because of all the “opportunities” to avoid it (think “loopholes”). Congress provided “escape hatches” for their donors. The only ones who ever paid this high rate were the uniformed or the middle class taxpayer who may have won the lottery one year. Reagan got rid of all that BS, simplified the tax code, making it fair for EVERYONE, dropped the ordinary income tax rate to 28% and set off the most generous economic growth ever experienced.

    What is more inequitable than high unemployment, low labor participation, stagnate economic growth, high percentage of families living below the poverty rate as was the case during the eight years of the Obama presidency?? Lower tax rates stimulate innovation and economic growth, such as they did during the Reagan presidency and are currently doing the last two years. See “Real Clear Polotics” article: https://www.realclearpolicy.com/blog/2016/01/05/reagans_economy_vs_obamas_1508.html

    There is a great article in the WSJ responding to Mayor de Blasio’s remark: “Here’s the truth. Brothers and sisters, there’s plenty of money in the world. There’s plenty of money in this city. It’s just in the wrong hands.” State of the City address, Jan 10, 2019. https://www.wsj.com/articles/money-in-the-wrong-hands-11547411831?mod=searchresults&page=1&pos=4 This article shows the hypocrisy, class envy, and social foolishness of this mind set.

    People with earned wealth not only created life changing products and services but also create good paying jobs and contribute a significant portion of their wealth to society, in a much more efficient manor than the government. Check out Bill Gates and his worldwide contributions.

    The “Free Market” is not perfect but it is way better than all the other alternatives recently tried. Let’s not tax it out of existence.

  4. Before you go nation-wide with higher top marginal income tax rates, I suggest you perform an experiment in California first.

    Raise California taxes:
    – see wealthy individuals and business move to other states
    – see state revenues drop

  5. This piece is a great corrective to the line taken by mouthpieces for the wealthy like the American Enterprise Institute, which insists that ‘rich people are not the problem, it’s poverty that we need to address’ and they claim that so long as crumbs are thrown to those prone in the gutters, it’s ok to have some being carried about in sedan chairs.

    We (residents of large societies) are going to be governed, one way or another. At least through centrally organized representative democracy we can have some small say in how we are governed. That’s more than we have under the rule of plutocrats.

  6. I started my career in the Eisenhower, Kennedy, Johnson years. That progressive tax rate was fair. The richer you are the more government services and infrastructure you use.

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