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For an Increasing Number, Soaking the Rich Is Just the Right Thing to Do

January 15, 2019 in Economics

By Ryan Bourne

Ryan Bourne

One motivating factor in my moving to the US was to avoid the
consequences of a class-war fuelled, economically damaging, Jeremy
Corbyn tax agenda. Well, politics is surprising sometimes. The
state of debate in the US this week has left me wondering whether,
on that front, I’d have been better sticking around.

Alexandria Ocasio-Cortez, the freshly elected Democrat
congresswoman from New York, kicked off the political week by
proposing a new income tax rate as high as “60pc to
70pc”. Few of us have any prospect of surpassing the $10m
(£7.8m) threshold she proposes for when it would kick in. But the
response to such a punitive rate, in this supposed land of radical
free enterprise, was muted indifference.

Several top economic commentators, including New York Times
columnist Paul Krugman, emphasised that such high tax rates were
common in the Fifties, when the US grew robustly. He reminded us
too that a group of top economists, including Nobel Prize winner
Peter Diamond, actively recommend 70pc-plus marginal tax rates on
high earners.

Conservative responses, meanwhile, were defensive. Their main
retort centred on how high rates wouldn’t effectively raise
revenue. Few objected in principle to the government taking so much
from anyone’s additional income. Even fewer worried about how
reducing the payoff to entrepreneurship could adversely affect
growth prospects. The respectful tone of disagreement made the
vitriolic debate we saw here over the 50p tax rate all seem rather
alien.

In truth, the argument from Krugman that reintroducing 70pc tax
rates in America is not radical entails a major bait-and-switch.
Yes, the US did have very high tax rates on top earners in the
Fifties and early Sixties… in theory. As Phil Magness at the
American Institute for Economic Research has shown, in 1963
official marginal rates exceeded 50pc for those earning $130,000 in
today’s money, rising to 92pc on top earners. But the effective
rates actually paid were substantially lower. A complex system of
deductions, loopholes and workarounds (such as use of
employment-related benefits) lowered people’s actual
liabilities.

Yet the result from economists such as Diamond that 70pc-plus
marginal rates today are optimal presumes that governments can
fully negate such avoidance. Without this assumption, the
“optimal” rate is much lower, and far lower than the
Fifties. These models are also based on a whole host of
questionable economic and philosophical assumptions, including the
idea that governments shouldn’t care about the welfare of the rich
and that the rich will not really respond in their work and savings
decisions. Breach one, or both, of these assumptions and the
supposed “optimal” tax rate falls substantially
further.

The key insight of this literature is actually that, absent
eliminating the ability to “tax …read more

Source: OP-EDS

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