AOC’s proposal to increase the top marginal income tax rate to 70 percent is getting lots of attention in the media. Conservatives predictably find it ridiculous; left-center pundits and economists think it is perfectly reasonable. Who’s right?
Here are my thoughts on the matter:
- The arguments in favor of the 70 percent rate are: (a) nothing in the data for the period between Truman and Reagan suggests that a 70 percent rate destroys growth; (b) there are recent studies by reputable economists supporting even higher rates; and (c) the marginal utility of a dollar for a billionaire is far less than it is for a less affluent person.
- However: (a) capital is far more mobile today than it was prior to 1980; (b) there are also far more places for it to land; (c) recent experiments with supertax rates in the UK and France didn’t really work; and (d) Trump is proof that wealthy people value their last dollar as much as any of the others.
- The incentive issue is typically framed in terms of a wealthy person’s willingness to work, but that really isn’t the problem. The real issue relates to risk-taking, and entrepreneurial behavior; projected returns on marginal investments at a higher tax rate may well fail to justify the risk of the investment, which thus will not happen. That is a negative consequence for employment and the economy in general.
Personally, I think 70 percent is too high. 50 percent strikes me as an appropriate balance. The marginal rate issue, however, cannot be viewed as a stand-alone; the real question is whether the money raised will be put to a good enough use to justify the increase. That is a topic for a different day.