Happy New Year! As we embrace a new year amidst the ongoing government shutdown (which isn't affecting me at all), newly sworn in congresswoman Alexandria Ocasio-Cortez said in an interview with 60 minutes that top tax rates on the super rich for income above $10 million should be 70%! The conservative blogosphere predicatbly blew up.
This all got me thinking about tax rates again. Back in May of 2017 I proposed a tax plan with a rate of 45% for income above $10 million, far lower than Cortez's 70%. Many have claimed that her rate is far too high. Too "radical" as Anderson Cooper described it. It definitely seems radical, even when you consider that the highest marginal tax rates in the 1940s and 50s were as high as 94%.
Enter Nobel prize winning economist Paul Krugman. In a recent New York Times OpEd, he writes on how many other economists (even some Nobel prize winning ones) calculate the optimal top tax rate to be over 70%:
Peter Diamond, Nobel laureate in economics and arguably the world’s leading expert on public finance. (Although Republicans blocked him from an appointment to the Federal Reserve Board with claims that he was unqualified. Really.) And it’s a policy nobody has ever implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.
To be more specific, Diamond, in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rate to be 73 percent. Some put it higher: Christina Romer, top macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates it at more than 80 percent.
Krugman continues on how the top tax rates is based on two primary factors: Diminishing marginal utility and competitive markets, [emphasis mine]
Diminishing marginal utility is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it.
What this implies for economic policy is that we shouldn’t care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want.
So why not tax them at 100 percent? The answer is that this would eliminate any incentive to do whatever it is they do to earn that much money, which would hurt the economy. In other words, tax policy toward the rich should have nothing to do with the interests of the rich, per se, but should only be concerned with how incentive effects change the behavior of the rich, and how this affects the rest of the population.
Seems reasonable. Tax the rich too high, Krugman argues, like at 100%, and you'll stifle all incentive to work any harder resulting in diminishing returns. But what's "too high" is a threshold beyond an optimal top tax rate that would drive the largest tax revenue, that experts argue is much higher than the top tax rates that currently exist. He continues, [emphasis mine]