Alexandria Ocasio-Cortez and the Top Marginal Tax Hike Boondoggle

Socialist newcomer Alexandria Ocasio-Cortez recently revived a radical Democrat talking point from its slumber, suggesting to Anderson Cooper in a 60 Minutes interview that we should have a top marginal income tax rate of 70% applied to an arbitrarily set $10 million or so in annual earnings, or the "tippy tops" of income earnings, as she frames it.

First, let's state the obvious.  When the top marginal tax rate is discussed in this manner, taxation is nothing more than a political cudgel to advance a narrative of class struggle.  But let's pretend, as leftist social engineers often do, that there's actually an economic argument behind it.

Perhaps a good place to start is with the godfather of government stimulus himself, John Maynard Keynes.  He observed that "[t]axation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, in balancing the Budget." 

It's interesting to note that, in this area, his ideas are not far removed from supply-side economists like Arthur Laffer, who observe that there is obviously a certain point at which tax rates can be so high as to reduce government revenue.

The reason for this is simple.  Effective tax policy is a matter of economic calibration, and tax rates being arbitrarily (and massive tax increases on the "tippy tops" of income is as arbitrary as it gets) ratcheted upward may certainly be presented as a means to increase revenues, but the actual result is often to both disincentivize productivity and incentivize alternatives to paying the higher income tax rates, like tax-exempted securities or accounting mechanisms to avoid paying.  This reaction among these individuals understandably vexes social engineers and leftist demagogues, who long to redistribute the highest earners' wealth, but it's reality nonetheless.

History has shown that the end result is often that higher marginal tax rates on top earners do not increase government revenue.  Quite the contrary: History couldn't be clearer in showing that when top marginal tax rates have been lowered, government revenue has increased.

There have been four periods of broad income tax cuts since 1913.  The first began in 1920, when the top marginal rates fell from 73% to 24%.  The second was the 1960s, where the rate fell from 91% in 1963 to 70% by 1971.  The third was the substantial Reagan-era tax cut, where the top rate when from 70% in 1980 to 28% in 1988.  The fourth was the Bush-era tax cut from 39.6% in 2000 to 35% in 2003.

Without exception, each and every one of these tax cuts yielded economic growth and increased revenue to the government.  Even the 2017 Republican tax cut, which lowered the top marginal tax rate from 39.6% to 37%, has already yielded an immediate increase in federal revenue, as the New York Times laments.

Not only have such tax cuts increased government revenues every time they've been achieved, but taxation has perpetually become more progressive for our having done so.

Take the aforementioned 1920s, for example.  Under the Treasury's Secretary Andrew Mellon, the top marginal tax rate went from 73% in 1920 to 25% in 1929.  The end result of this was increased revenue to the federal government, and moreover, the share of taxes paid became much more highly progressive, not regressive.  Earners making $100K or more in 1920 represented a share of just 30% of the income tax paid, whereas in 1929, that same demographic represented more than 65% of the income tax paid.

This should present an intellectual quandary for proponents of raising the top marginal tax rate.  After all, the hypothesis is, ostensibly, that levying higher taxes on Americans' highest earnings forces higher income-earners to not only pay more in taxes, but pay a greater share of federal taxes.  This is what they mean by tax policy that would require the "rich" to "pay their fair share." 

History proves, however, that there are many examples where lowering the top marginal tax rates has achieved both of those outcomes.  So why aren't they in favor of keeping the top marginal tax rate lower in order to get the "rich" to pay their "fair share," when it's obvious that the "rich" pay more in taxes when their top income tax rates are lower than, say, 70%? 

We should deal in reality, not talking points.  The nature of our current tax system would make such an aggressive hike on top marginal tax rates disastrous.  The top 20% of income-earners in the United States now pay 87% of federal income taxes.  Inversely, the bottom 40% of American income-earners not only pay no income taxes, but collect additional income from the federal coffers.  Seeking tax policy that would make such discrepancies in the tax burden more progressive than it already is should be a fool's errand, but suffice it to say, disincentivizing productivity or encouraging tax avoidance among the highest earning demographic by arbitrarily hiking the top marginal rates would be tantamount to cutting off our nose to spite our face – especially if the goal is that the "rich" pay more in taxes or a greater share of tax revenue. 

So, since there's little to no evidence that hiking top marginal tax rates to an obscene rate will do what leftist social engineers suggest that it might do, why are they out there pitching that strategy? 

Franklin Delano Roosevelt answered that question long ago.

In July 1941, Roosevelt suggested to his budget director that he would like "to see a tax which would tax all income above $100,000 at the rate of 99.5%."  When his budget director was understandably aghast at the suggestion, according to Mark Leff in his book The Limits of Symbolic Reform, FDR jokingly said, "Why not?  None of us is ever going to make $100,000 a year."

You may hear that there's more substance than this behind the calls for government to arbitrarily set high income tax rates upon arbitrarily high amounts of income.  There's not.  It's about nothing more than promoting the politics of envy and promoting class warfare to increase the government's power to redistribute wealth.  That makes it no less dangerous, because human nature remains unchanged, and this type of rhetoric remains an effective propaganda tool to rouse and enrage the populace, and particularly the SJWs whom Democrats, headlong into a hard pivot leftward, are courting with increased fervor.

After all, none of us is ever going to make $10,000,000 a year.

William Sullivan blogs at Political Palaver and can be followed on Twitter.

Image: Corey Torpie via Wikimedia Commons.