The high tax pipe dream

  • 14 January 2019
  • NormanL

Newly-minted Democratic Rep. Alexandria Ocasio-Cortez made a bit of a slash when she called for raising the top federal tax rate to 70 percent. It would apply, we are assured, only to the "super wealthy," and would help the government pay for a "Green New Deal."

Putting aside that idea for a bit...would such a tax rate raise the hundreds of billions of dollars the far left believes it would? According to the Tax Foundation, no, it wouldn't. They start with some basics -- namely, we have no details on what kinds of income would be taxed under this scheme:

So far, Congresswoman Ocasio-Cortez has not been specific about her proposal for a 70 percent tax rate. However, her comments imply that she wants to add an eighth tax bracket of 70 percent on incomes over $10 million. What this means is that individuals would need to pay 70 cents for every dollar they report in taxable income over $10 million. It’s not clear yet whether it would apply only to ordinary income (wages, salaries, interest, business income), or if it would apply to all income (ordinary income plus long-term capital gains and qualified dividends).

So they run the numbers under two different models. The first:

Add an 8th tax bracket at 70 percent on taxable income over $10 million for all filing statuses. Applies to only ordinary income. Bracket widths are not adjusted for filing status.

The second:

Add an 8th tax bracket at 70 percent on taxable income over $10 million for all filing statuses. Applies to ordinary income and qualified income. Bracket widths are not adjusted for filing status.

And the results:

We estimate that applying a new 70% tax rate on ordinary income over $10 million (proposal 1) would raise about $291 billion between 2019 and 2028. While taxpayers would react to proposal 1 by reducing taxable income, the effect wouldn’t be significant. As a result, the proposal would still raise revenue each year over the budget window.

Counterintuitively, if the 70 percent tax bracket were to apply to all income over $10 million, the proposal would raise much less revenue. We estimate that proposal 2 would raise $51.4 billion between 2019 and 2028 and lose revenue in the first two years of its enactment.

Losing money on a tax hike?

Yes, and for a very simple reason: incentives matter...

The reason why a 70% tax rate on all income over $10 million would raise very little revenue is due to how taxpayers would react to the much higher tax rate on capital gains. Under current law, capital gains are taxed only when they are “realized” — that is, when the assets are sold. This means that individuals can effectively choose when to pay the tax. As a result, capital gains are very responsive to the tax rate.

As we've known for a very long time. But the Tax Foundation runs the numbers under a dynamic scoring model and finds higher taxes actually lose money for the government as the private sector gets squeezed.

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