70% top marginal tax rate: Opposed
High Tax Rates Aren’t Optimal
Nobody really thinks a top rate of 70% or 80% is a good idea in the real world.
249 Comments
By
Holman W. Jenkins, Jr.
Jan. 8, 2019 7:03 p.m. ET
Paul Krugman speaks in Mexico City, Oct. 18, 2017. PHOTO: JORGE NUNEZ/ZUMA PRESS
Paul Krugman, a Nobel Prize winner, wears his learning lightly in his New York Times column, all the better apparently to focus on his real purpose: characterizing anyone associated with “the right” as an evil idiot.
This week he leapt to the defense of Democratic freshman Rep. Alexandria Ocasio-Cortez’s idea of paying for a “Green New Deal” with a 70% marginal tax rate on the incomes of top earners.
Now your intuition might be that neurosurgeons and other highly paid folk would work less if the government took 70% of the proceeds. Or that lobbyists and politicians would find it remunerative to arrange loopholes on behalf of these taxpayers, which would also negate the hoped-for revenues.
But Mr. Krugman cites studies that suggest these effects are negligible. The superfluous earnings of these taxpayers aren’t really so valued by themselves or by society. A 2011 paper by Peter Diamond and Emmanuel Saez, based on a variety of extrapolations, calculates that the “optimal” top tax rate is 73%. A paper the same year by Christina and David Romer finds an even higher “revenue maximizing” top tax rate of 84%.
Case closed? Not even slightly. Messrs. Saez and Diamond are describing a world in which the wealthy have no opportunity to shield or hide their incomes. Look closely and the authors’ “optimal” top federal rate quickly becomes 48% in a tax code like America’s when state taxes are included.
And not even the Romers are convinced by their 84% top rate. Their study looks only at interwar tax returns, when the tiny number of relevant taxpayers received mostly partnership and dividend income. Their work tells us nothing about an 84% rate’s impact on labor effort in an economy like today’s.
They also point out that some of their data are “imperfect” and the results “perverse.” To wit, did the rich in the 1920s and ’30s really spend more on machinery and equipment even as the tax hit went up, yet at the same time form fewer new businesses?
Their findings, they add, may be “confounded by the enormous shocks affecting the economy over this period” (war, inflation, deflation, depression). And their results fly in the face of “comparable postwar studies” that find significant detrimental effects from high marginal tax rates. On second thought, their own study may find such effects too if their discovery of reduced business incorporations in the 1920s and ’30s “holds up under further scrutiny.”
You would hardly call this a strong basis for junking the well-established principle that 80 is more than 20, and prospective earners and taxpayers treat it as such.
In fact, the Romers are right: A large and growing literature continues to support the claim that high marginal tax rates and big tax hikes are harmful to economic well-being. See the work of the Dallas Fed’s Karel Mertens and colleagues, or the Romers’ own 2010 work finding a “highly contractionary” effect from postwar tax hikes.
The theoretical cases for towering “optimal” tax rates that Mr. Krugman cites always tend to trip up over political realities if nothing else. Politicians may find it politically handy to be seen dinging the rich, but they also find it useful to placate the rich by dishing out loopholes. The net result isn’t more revenue. It’s more efficiency-inhibiting economic distortions.
We would also appeal to a simple, real-world intuition. Take Mr. Krugman’s suggested 70% rate on incomes over $1 million. If it were really possible to fatten government spending annually by as much as $650 billion (to use 2016 tax data) without killing the golden goose, we have to believe U.S. politicians would be doing so already.
Ditto Ms. Ocasio-Cortez’s proposal to tax only income above $10 million at 70%, which might theoretically yield $224 billion. Except all evidence suggests that the richest taxpayers are the most diligent about mobilizing lobbyists and politicians to finagle the tax code on their behalf.
The new congresswoman from Queens is to be admired for a plan that would hit her party’s own blue-state voters hardest. But let’s remember why we’re having this discussion. Even $224 billion falls short of the estimated $1 trillion to $2 trillion in annual spending necessary to stabilize atmospheric CO2 by midcentury.
Her defenders will hasten to point out that she speaks only of zeroing out U.S. emissions, albeit by 2030. But U.S. emissions are only a 15% share (and shrinking) of the global total. Unless she has a plan for the rest of the world, her Green New Deal is self-refuting. She’d have the U.S. spending $224 billion annually to have no meaningful effect on climate.
But we digress. The real purpose of revisiting the alleged optimality of high marginal tax rates right now lies elsewhere. The goal is to make the spending plans of the ultraliberals sound plausible enough to lure millennial voters off the couch and into the voting booth. Like the young everywhere, they are excited by radical proposals as long as somebody else is paying.
Appeared in the January 9, 2019, print edition.
Last modified: Friday, 25 January 2019, 3:16 PM
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