Congresswomen Alexandria Ocasio-Cortez, Ilhan Omar, and and others prepare to take a group photograph of the House of Representative Democratic women members. Photo / AP
US Congresswoman Alexandria Ocasio-Cortez floated a 60 to 70 per cent tax rate on the richest Americans in an interview with CBS News' 60 Minutes that was released on Saturday.
She argues that higher taxes on multimillionaires could help pay for the "Green New Deal" she and other left-wing members of the Democratic Party have proposed.
Talking to Anderson Cooper, the new House of Representatives member suggested the new tax rate apply to Americans earning more than US$10 million a year, noting that similar rates existed in America a few decades ago.
The top tax rate was above 90 per cent during the 1950s, and while it has slowly descended, it remained as high as 50 per cent for much of President Ronald Reagan's tenure in the 1980s.
American households that earn more than US$600,000 annually currently pay a 37 per cent tax rate, down from the 39.6 per cent rate they paid before the Republican tax law passed in 2017.
Conservatives have pushed for lower taxes on the rich as a spur to economic growth, while liberals see potentially untapped revenue that could fund their key social spending priorities, such as Medicare for all and free college tuition.
"There's an element where, yeah, people are going to have to start paying their fair share in taxes," Ocasio-Cortez told 60 Minutes.
How much revenue could new taxes on the rich really raise? We looked at the numbers, enlisting the help of a number of tax experts, including Mark Mazur, a former Treasury Department official now at the Tax Policy Centre, a centrist think-tank; Joel Slemrod, a tax expert at the University of Michigan; and Ernie Tedeschi, an economist who served in President Barack Obama's Treasury Department.
1) US$720 billion/decade: Ocasio-Cortez's suggestion for nearly doubling taxes on people earning more than US$10 million
In 2016, the latest year for which government data is available, approximately 16,000 Americans earned more than US$10 million each. These are not in fact "the 1 per cent" many on the left like to talk about - they are a much smaller slice, fewer than 0.05 per cent of all US households.
It's difficult to estimate precisely how much more in taxes the government could wring from this ultra-elite. Collectively, their total taxable income amounted to US$405 billion in 2016, and they paid about US$121 billion in federal income taxes. They also face state and local taxes, which raise their overall tax burdens.
As she noted to 60 Minutes, Ocasio-Cortez's idea for a 70 per cent tax rate on those earning more than US$10 million would only kick in beyond the first US$10 million in income. So, this new tax rate would do nothing to add to the amount of federal revenue on the first US$160 billion (16,000 people multiplied by US$10 million) in taxes this group paid.
'60 MINUTES' SUNDAY:
— Steven Portnoy (@stevenportnoy) January 4, 2019
Alexandria Ocasio-Cortez suggests taxes as high as 70% on the wealthiest to pay for a "Green New Deal."
"If that's what radical means, call me a radical," @AOC tells @AndersonCooper. pic.twitter.com/fcw2YtdeSD
But that leaves about US$244 billion in taxable income for those earning more than US$10 million a year. If this entire pool was taxed at 70 per cent instead of the 39.6 per cent they paid in 2016, the federal government would bring in an additional US$72 billion annually - or close to US$720 billion over 10 years, according to Mazur. The real number is probably smaller than that, because wealthy Americans would probably find ways around paying this much-higher tax.
"You'd certainly see some people under that system change their behaviour to avoid the higher rate, which could significantly impact how much revenue it generates," Mazur said, adding that the effect would be hard to estimate. (The exercise also assumes capital gains would be taxed at this much higher rate.)
This US$720 billion in a decade is not nearly enough to fund Medicare for all, which has been estimated to increase government outlays by about US$30 trillion over a decade (while also zeroing out premiums and deductibles paid by Americans).
Still, it could fund a number of other measures. It could come close to funding the entirety of Senator Bernie Sanders' free college tuition plan (US$800 billion), fund President Barack Obama's plan to get close to universal prekindergarten (US$75 billion over a decade), forgive more than half the student debt in America (US$1.4 trillion), cover Democratic leaders' plan for boosting teacher pay and school funding (US$100 billion), or come close to funding a US$1 trillion infrastructure plan.
And of course, higher income tax rates on the top 16,000 households is not the only way to raise taxes on rich Americans.
Outstanding article on modest poss increases in wealth taxes by @TorstenBell https://t.co/kZsyxMJfrw
— John Rentoul (@JohnRentoul) January 5, 2019
2) US$3 trillion/decade: A wealth tax on the top 1 per cent similar to those in Europe
The American government currently raises tax revenue primarily through payroll taxes and income taxes, and gets a smaller chunk from estate taxes and corporate taxes. It has not adopted a kind of tax that exists in some European countries: a wealth tax, wherein the federal government takes a chunk based on household wealth rather than income.
Norway, for instance, in 2016 taxed at a rate up to 0.70 per cent for all wealth over 1.4 million kroner (US$162,568). France's wealth tax in 2017 hit assets above 1.3 million euros (US$1.4 million).
Slemrod, of the University of Michigan, said in an email that the wealthiest 1 per cent of Americans own roughly one-third of the US$107 trillion in wealth in America. This group collectively holds about US$20 trillion in wealth above US$10 million per household.
From there the calculation of wealth tax is simple: a 1 per cent wealth tax on the wealthiest 1 per cent of households above US$10 million could raise about US$200 billion a year, or US$2 trillion over 10 years. Tedeschi, the former Obama official, found a 0.5 per cent wealth tax on the top 1 per cent could raise at most US$3 trillion over 10 years.
Nobel-winning economist says Alexandria Ocasio-Cortez tax policy is ‘fully in line with serious economic research’https://t.co/tlpD4nsnY4
— Raw Story (@RawStory) January 5, 2019
But this, too, would probably change Americans' behaviour and perhaps lead them to try shifting their wealth overseas, and the economists say the actual amount of revenue is likely lower than their estimates suggest. And this is assuming there are no exemptions to what is considered wealth, such as housing assets.
Plus, this approach would require Americans to give the Internal Revenue Service a full accounting of all the assets they own under law - something that could be required under law but may prove difficult to evaluate.
In 1990, the federal government did try something similar by placing excise taxes on sales of yachts, expensive automobiles, jewellery and other things consumed by rich people. But that effort came right before a minor recession, leading to the repeal of the taxes.
"The difficulties of monitoring and compliance are huge," Mazur said of the wealth tax. "But it could be done and raise a lot of money."
No one thinks this is scandalous. Dance away (was actually pretty good).
— Dan Crenshaw (@DanCrenshawTX) January 4, 2019
What is scandalous is increasing income taxes to 70%. It’s wholly unethical for anyone to work a majority of the year just to give their money to the government.
Dancing’s great, but ideas matter more. https://t.co/8RIShEJjAL
3) US$3 trillion/decade: Doubling income taxes on the top 1 percent
In 2012, the economists Peter Diamond of the Massachusetts Institute of Technology and Emmanuel Saez of the University of California at Berkeley published a paper arguing the optimal top tax rate is 73 per cent.
In 2018, that would raise the tax rate on income above US$600,000 from 37 per cent to 73 per cent, but back then it meant increasing the top rate from 39.6 per cent to 73 per cent.
The IRS says that Americans earning more than US$600,000 annually compose the richest 0.9 per cent of families, so we'll use that for shorthand for the 1 per cent.
In 2016, this richest 0.9 per cent earned about US$1.7 trillion in taxable income and paid about US$530 billion in taxes. These Americans would have to pay an additional US$320 billion every year in taxes if the top tax rate went up to 70 per cent, according to calculations based on IRS data.
Mazur noted this estimate was probably high because the wealthy would probably find ways to try to shelter themselves from higher taxation, such as by buying tax-exempt bonds.
Lowering the corporate tax rate to 21%, which is lower than it's been since 1938, is a lot more radical than taxing income over $10 million at 70%.
— Judd Legum (@JuddLegum) January 5, 2019
In today's dollars, income over $658,213 was taxed at 70% in 1980.
AOC's more modest proposal would only impact 0.05% of Americans
Other economists found similar results. Tedeschi put the number at about US$300 billion annually. Raising tax rates for the top 1 per cent to 57 per cent would raise about US$1.7 trillion over a decade, while raising it to 83 per cent would raise US$3.8 trillion over that period, Tedeschi found.
"You can get a hell of a lot of a money from taxing the 1 per cent," said Edward Wolff, a tax expert at New York University.
The Congressional Budget Office also recently estimated that raising taxes on the two highest income brackets by 1 percentage point would net US$123 billion over 10 years. That would be for everybody who earns more than US$200,000 annually.
The CBO also found that a 0.1 per cent financial transactions tax on Wall Street would raise an additional US$780 billion over 10 years, while returning the corporate tax rate to 35 per cent would raise an additional US$1 trillion over a decade. (The Republican tax law of 2017 lowered that rate from 35 per cent to 21 per cent.)
But Americans outside the top 1 per cent would probably pay at least part of both these taxes, Tedeshi said.
Overall, just including a new wealth tax and significantly higher income taxes, the federal government could probably raise an additional US$2 trillion to US$3 trillion a decade by taxing the 1 per cent alone, according to Tedeschi.
Look, it's unquestionably true that we used to tax the ultra rich at much, much, much higher rates than we do now. It's true the top marginal rate hit a lower percent of earned income, but we taxed the highest income a LOT more. People implying otherwise are being misleading. pic.twitter.com/ffgnAZHjRQ
— Bobby Kogan (@BBKogan) January 5, 2019