Should the richest Americans pay a 70% marginal tax rate? Alexandria Ocasio-Cortez, the 29-year-old New Yorker who recently became the youngest Congresswoman in history, says it's worth considering.
In a highly publicized interview with Anderson Cooper on 60 Minutes, Ocasio-Cortez, who is often known on the Internet by the nickname "AOC," embraced her characterization as a radical, said that there's "no question" President Donald Trump is a racist, and called for a wide range of ambitious progressive causes that might be paid for with significantly higher taxes on the rich.
The so-called Green New Deal that Ocasio-Cortez and other Democratic upstarts are backing include lofty — and expensive — goals like achieving universal health care and converting every facet of the U.S. economy to renewable sources of energy in 12 years. And how might America pay for programs like these? One possibility that Ocasio-Cortez raised is for the U.S. to have significantly higher taxes on the rich — including tax rates upwards of 70% — and that the country needs the wealthiest people today "to start paying their fair share in taxes."
How Would the Alexandria Ocasio-Cortez Tax Plan Work?
First off, Ocasio-Cortez hasn't released a tax plan, or even much of a detailed proposal. There is no bill, and even if there was one featuring a 70% tax rate on the rich, it is hard to imagine it passing into law.
For now, all we have are Ocasio-Cortez's comments on 60 Minutes, which have sparked fire — pro and con — on social media and cable news. In response to Anderson Cooper's question about what kind of new tax rate she has in mind to cover the costs of "Green New Deal" programs, Ocasio-Cortez said:
In the interview, Ocasio-Cortez also said, "People are going to have to start paying their fair share in taxes."
But she doesn't state exactly who should pay more in taxes or specify what income levels would face higher tax rates. Again, there is no real plan. All she said is that decades ago, tax rates on the ultra-rich were much higher than they are now. And yes, according to data from the Tax Foundation, during the 1960s, 1970s, and even into the early 1980s, the marginal tax rate in the U.S. was often 70% on the highest levels of household income (which back then was earnings in excess of around $200,000).
Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, pointed out that these high tax rates, though astronomical compared to today's levels, were routinely applied to the highest earnings of the wealthy in "the United States, for 35 years after World War II — including the most successful period of economic growth in our history."
Who would pay higher taxes if Ocasio-Cortez's ideas somehow become a reality? Data cited by the Washington Post indicates that as of 2016, only 16,000 tax filers — or 0.5% of U.S. households — had income over $10 million. So if a 70% tax rate was applied to households with income over $10 million as Ocasio-Cortez seems to be suggesting, it might affect less than 1% of households.
As Krugman put it, the main reason to consider a significantly higher marginal tax rate like the one suggested by Ocasio-Cortez is that America "did just fine" economically during the decades when such tax rates were in effect, and that "a policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction."
What Is a Marginal Tax Rate?
Not all of an individual's income is taxed at the same rate. In the U.S., households pay lower tax rates on income in the lowest brackets, and pay increasingly higher tax rates on income in higher brackets. This is a marginal tax rate, defined by Investopedia as "the tax rate incurred on each additional dollar of income."
Right now, there are seven federal income tax rates. Regardless of what tax bracket you're in at the high end, most single filers have a 10% tax rate on the first $9,525 they earn (after adjustments and deductions,) then a 12% tax rate on income between $9,526 and $38,700, all the way up to a 37% tax rate for income of $500,001 or more.
So the new tax rates envisioned by Ocasio-Cortez would not mean that households earning over $10 million would pay 70% in taxes on all of that income. Instead, they'd pay the higher rates only on income over that threshold.
Ocasio-Cortez has said that critics have been overlooking that the U.S. has a marginal tax rate system in order to mischaracterize her call for higher taxes on the rich.
How Much Money Could Be Raised With a 70% Tax on the Rich?
There are so many unknowns that it's difficult to predict how much Ocasio-Cortez's tax on the rich would or could generate.
Tax experts consulted by the Washington Post say that a 70% on income over $10 million could theoretically bring in an additional $72 billion per year in taxes, or $720 billion over a decade. That would be nearly enough to cover Bernie Sanders' plan to provide tuition-free college, estimated at a cost of $800 billion, for instance.
However, "the real number is probably smaller than that, because wealthy Americans would probably find ways around paying this much-higher tax," the Post notes.
Conservatives also argue that taxing the rich at extremely high rates is simply unfair and bad for the economy, and that taxes would have to be raised across all income levels if America truly wanted to enact a "Green New Deal."
If that's what Ocasio-Cortez and others in the Democratic party want, it "needs to stop talking stupidly about 'the rich,' and begin making the case for the considerably higher middle-class taxes that will be needed to pay for the considerably higher social spending it covets," National Review Online editor Charles C.W. Cooke wrote today. And such a plan would be "probably politically suicidal."