Noah Smith: First of all, let’s be clear that Ocasio-Cortez’s proposal would only apply to income above $10 million. So it would affect an extremely small number of people. It would raise little revenue and do very little to reduce inequality.
Her proposal, which would make the tax structure similar to the one the U.S. had in 1921, is pretty much symbolic — a way of expressing disapproval of inequality, while kicking off a lively discussion of income taxes and redistribution. On the other hand, raising taxes to 70 percent on income above, say, $300,000 a year — as Diamond and Saez proposed — would be an entirely different animal. It would raise lots of revenue, but it would also run the risk of many of the economic harms that Michael and Tyler describe. So let’s be clear about which of these ideas we’re talking about.
Ultimately, the question is whether we want to make the tax system more progressive — whether the risks of discouraging entrepreneurship, innovation and entry into high-value careers outweigh the opportunities to make life better for the vast numbers of poor and working-class Americans who have been hammered for decades by wage stagnation, the Great Recession and the China Shock. I think that there is definitely scope for significantly more redistribution, even though the costs are real.
Karl: Noah isn’t the only commentator who has pointed to Diamond and Saez to support rates as high as 70 percent. So it’s worth taking a moment to understand what the research on taxation is actually saying. If all you care about is maximizing revenue, and you have the ability to completely eliminate loopholes, then rates as high as 70 percent or more make sense. If, on the other hand, you accept that even with the best reforms the tax system will have flaws, then the ideal redistributive system looks a lot more like what we have today.
Almost two decades ago, Jon Gruber and Emmanuel Saez wrote a paper that considered two potential models, both of which value the well-being of the poor far more than that of the middle class or affluent. One, which they call the “progressive liberal” model, calls for a marginal rate on higher earners of 49 percent. The other, which they call the “compassionate conservative” model, imposes a marginal tax rate on the highest earners of 18 percent. In other words: What makes these systems redistributive is not punitive tax rates on the rich, but broad-based taxes that are used to fund a universal basic income for everyone.
Michael: Noah, your comments imply that policymakers need to weigh the harm from collecting more tax revenue against the benefits from more redistribution. That’s a good way to think about this, of course. But I think we should be draw a distinction between making the tax system more progressive and making it more punitive. You describe Ocasio-Cortez’s proposal as being “pretty much symbolic.” I don’t like either the meaning or the message behind the symbol.
Tyler: There are plenty of better ways to improve the lot of poorer people than by instituting economic measures that we all seem to regard as ineffective and distortive. Improving education, limiting occupational licensure, and deregulating building in America’s most productive cities would be on the list, among other ideas. Are Ocasio-Cortez and other Democrats doing America a service by focusing so much attention on a misguided tax proposal? The answer is a simple no.
Noah: The most important thing we need to be spending more money on is the transition to green energy. Ocasio-Cortez has laid out an ambitious plan to replace most fossil-fuel energy with carbon-free sources by 2030, called the Green New Deal. Upgrading the electrical grid to compensate for the intermittency of solar and wind, building electric vehicle charging stations, decommissioning coal plants and replacing them with wind and solar — it will all require a lot of money and resources. But in the end it’ll be worth it, not just for fighting climate change but for the country’s technological and infrastructure future. That seems like something that Tyler would endorse, given the focus on growth, technology, and environmental protection in his new book, “Stubborn Attachments.” So that’s what we need to be raising tax revenues in order to fund.
Redistribution is also an important goal. It’s not quite right to say that Diamond and Saez care only about maximizing revenue; what they care about is welfare. They assume that a dollar matters more to a poor person than to a rich person, so they assume redistribution is good. As inequality has risen, more and more Americans have taken a similar perspective. It’s not clear that the public is going to be satisfied with more education, or tweaks such as limitations on occupational licensing.
It is clear that inequality is something the American people care about, and that some kind of redistribution is coming sooner or later. The goal should be to try to direct that popular energy toward productive policies that reduce economic activity as little as possible. And given the evidence, income tax reform seems one of the safest such policies available.