- Rep. Alexandria Ocasio-Cortez of New York has touted a plan that would tax Americans earning more than $US10 million at a marginal rate of roughly 70%.
- The proposal was immediately met with consternation from the billionaire class, which argued that it would hurt the economy.
- Evidence shows, however, that the US economy has been strong during periods when the marginal tax rate for the ultrarich was at or above 70%.
- Peter Diamond – a Nobel laureate in economics who is one of the world’s most respected public-finance experts – crunched the numbers and found that the optimal tax rate for top earners was 73%.
When Rep. Alexandria Ocasio-Cortez of New York first unveiled a plan to hike taxes for the superrich, the outrage was harsh and swift.
The proposal – which calls for the marginal tax rate on income above $US10 million to be increased significantly, to 70% – faced immediate opposition from high-ranking Republican officials. Other pundits on social media used intense rhetoric in an attempt to discredit her proposition.
The backlash also came in droves in Davos, Switzerland at the recent annual gathering for the world’s wealthiest and most powerful elite. Business Insider spoke with three industry-leading finance professionals who all balked at the idea of a 70% marginal tax and expressed concern over a negative economic impact.
But underlying all of that fervor was one undeniable truth: The US has taxed the ultrarich to a similarly high degree throughout history, and the economy has hung in there just fine.
In fact, it’s thrived.
The chart below shows this dynamic in action. There are several key observations to be gleaned:
- The US economic growth rate has hovered near record lows over the past decade, even though tax rates for the ultrarich have also been historically low.
- From 1957 through the 1970s, the tax rate was at 70% or above, yet the economy was markedly stronger during that period than it is now.
- In fact, the 35 years following World War II were the most economically prosperous in US history – and the tax rate was at or above the 70% region proposed by Ocasio-Cortez.
Not convinced yet? Perhaps findings from Peter Diamond – a Nobel laureate in economics who is one of the world’s most respected public-finance experts – will do the trick.
Along with the inequality expert Emmanuel Saez, he coauthored an academic study in 2011 titled “The Case for a Progressive Tax: From Basic Research to Policy Recommendations.” And while the findings were quite complex, one number stuck out: 73%, the figure they arrived at when calculating the optimal tax rate for top earners.
That’s right in line with Ocasio-Cortez’s proposal.
If you haven’t yet had your fill of expert commentary from the genius class, consider the fact that the Nobel Prize-winning economist Paul Krugman wrote a column for The New York Times on this very subject, citing many of the same arguments.
There remains staunch opposition to the tax hike
Despite the Nobel-level credentials possessed by the aforementioned experts, there are still serious questions around what the ideal tax rate is for Americans who make more than $US10 million a year. While Diamond’s 2011 report has long stood as the benchmark, new research has come out to challenge its findings.
Perhaps the most notable example of this is a 2018 study conducted by the Georgetown University professor Alejandro Badel and two of his colleagues, Mark Huggett and Wenlan Luo. They ran what they describe as a “quantitative human capital model” and arrived at 49% as the optimal top tax rate.
There’s also the matter of what the world’s high-earning financial elite thinks about Ocasio-Cortez’s proposal. Sure, they’re more inclined to care about this since it directly affects them, but they also make some compelling arguments around how detrimental the economic impact could be.
Ken Moelis, the founder and CEO of Moelis & Co., is a good example. Business Insider spoke with him in Davos last month, and he didn’t mince words.
“If you impose a 70% tax rate on that type of wage earner, you’re going to crush the economy,” Moelis said.
Scott Minerd, the chief investment officer at $US265 billion Guggenheim Partners, adopted a similarly sceptical tone. In his Davos interview, he harped specifically on the impact he thought higher taxes would have on productivity.
“The frightening thing about high marginal tax rates is that it leads us into a low-productivity economy,” he said. “And we have a lot of headwinds already in this country.”
He continued: “For instance, the growth in the working-age population is declining dramatically. If you layer on top of that high marginal tax rates, you could actually build an economy that has zero growth potential.”
Bob Prince, the billionaire cochief investment officer at Bridgewater Associates – the world’s biggest hedge fund – is less concerned about the damage an ultrawealthy tax increase might have. His view is more agnostic and centered on the idea that a tax hike wouldn’t be enough to spur change.
“I don’t think it would solve any problems,” he told Business Insider in Davos. “The reason this is emerging as a topic is because of populism, income inequality. And they’re really rooted in much deeper issues that a 70% tax rate is not going to address.”
In the end, if this recap of the various arguments surrounding Ocasio-Cortez’s proposed tax is any indication, it’s clear the road to reform will be arduous, with smart, analysis-driven arguments on either side.
The only certainty is that will be a hot-button topic for months, even years, to come. And as a citizen, the best you can do is be fully informed.
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