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No, Economists Don't Agree a 70 Percent Top Marginal Tax Rate Is a Good Idea

January 9, 2019 in Economics

By Ryan Bourne

Ryan Bourne

Economic commentators
Matt Yglesias
,
Paul Krugman
, and
Noah Smith
believe Rep. Alexandria Ocasio-Cortez’s (D-N.Y.)
call for a 60 to 70 percent top marginal income tax rate is
uncontroversial. According to all three, the New York Democrat’s
proposal simply reflects the consensus of mainstream economics.

Their argument rests on two historical factoids. The first is
that the rich paid higher taxes in the 1950s, and the economy grew
just fine. The second “fact” is that an array of economists, from
Nobel Prize winner
Peter Diamond
, to
Thomas Piketty
and
Emmanuel Saez
, have produced peer-reviewed research showing
combined marginal rates as high as 70 to 80 percent are
“optimal.”

But dig into these
three papers, and you’ll find the
results reflect philosophy as much as economics. These economists
think they can plan the distribution of income to maximize “social
welfare.” But they arrive at the decision to impose extremely high
top marginal tax rates because they uniformly decide to put almost
zero weight on the welfare of the rich.

That means the sole aim of this cluster of economists is to
maximize revenue collected from high earners in order to transfer
to others. Presuming we could design a tax system from scratch that
eliminates the possibility of people avoiding taxes or hiding or
reclassifying income, they estimate the single combined marginal
tax rate that would generate maximum revenue to “soak the rich.”
Incorporating other wishful thinking about how the rich respond to
taxes, these economists wind up calculating that the “optimal” top
tax rate is about 70 percent, if you are also willing to
imagine closing off special treatment for capital gains and the
possibility of incorporation.

The astute reader can probably see some problems with
extrapolating from this theoretical calculation.

First, what if one thinks the welfare of the rich is actually an
important policy consideration? According to
a paper by Jonathan Gruber and Emmanuel Saez
, if we instead
pursued a “compassionate conservative” agenda—caring about
the very poor a bit more than others in society, but everyone else
equally, the optimal top rate might be as low as 30 percent. If we
were philosophically opposed to redistribution altogether, the
optimal rate tumbles to 3 percent. What counts as optimal varies
tremendously based on the philosophical assumptions the economist
starts with.

Second, what if we were not able to redesign the tax code to
eliminate avoidance? A 73 percent rate, the optimal rate calculated
by Diamond and Saez in 2011, is a combined rate (not just a
marginal federal income tax rate, as Ocasio-Cortez seems to be
proposing) that assumes we …read more

Source: OP-EDS

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