Representative Alexandria Ocasio-Cortez’s proposal to tax income above $10 million at 70 percent has generated a lot of debate. In Bloomberg Opinion, Noah Smith has argued that it’s a mainstream idea well worth discussing, while Tyler Cowen has contended that any talk of raising taxes only helps Donald Trump. But what about its effect on the economy? On government programs? On actual taxpayers? Joined by their colleagues Karl Smith and Michael Strain, Noah and Tyler continue the discussion below.
Michael Strain: I’d like to set aside the politics of Ocasio-Cortez’s proposal and look at the practical economic impact. The most prominent recent research comes from economists Peter Diamond and Emmanuel Saez, who argue for a much higher top rate. But things can get tricky when applying the findings of economic research to real life. For example, if the government will take 70 cents of every dollar you earn above a certain income threshold, why go to college? The threshold obviously matters, of course, but the basic point about the decision to acquire advanced skills remains.
A 70 percent top rate could negatively affect the careers people choose. A young person interested in health care might decide to become a nurse rather than a surgeon, because much of the income gained from being a surgeon will be taken by the government. There is nothing wrong with being a nurse, and being a surgeon is not better than being a nurse in a normative sense. But in this case, our hypothetical young person isn’t deciding to be a nurse because that’s her preference — instead, she’s making the decision because the top rate is so high. This sort of tax-driven inefficiency makes society worse off.
There is not much empirical evidence on how important these longer-term considerations are, because sorting through the drivers of educational and occupational choice is very difficult. But just because economists can’t assign a magnitude to these effects does not mean that real-world tax policy should assume they aren’t important.
Tyler Cowen: Another perverse effect: A 70 percent rate is likely to cause lots of distortions as people shift income into less heavily taxed forms. And the more the discussion centers around taxes, the more that helps Donald Trump, who is viewed as the more credibly low-tax candidate (yes, Americans still don’t like high taxes).
Noah, you admit in your column that Ocasio-Cortez’s plan won’t raise much revenue or much reduce inequality — so why do it? Besides, Paul Krugman has declared (again) that big fiscal deficits aren’t such a problem, so what is the hurry? Do you think he is wrong? Why not just wait and see if interest rates rise to problematic levels? More broadly, the focus should be on designing a 21st-century tax system that can jump-start innovation in the U.S. once again. Surely that is not going to require confiscatory rates for some of the most creative Americans.
Karl Smith: I agree that Ocasio-Cortez’s proposal is unlikely to raise much revenue but instead to encourage the proliferation of tax avoidance-schemes. What worries me more, however, is the gathering storm of populist sentiment that infects the right as well as the left.
Consider that Ann Coulter has not only endorsed Ocasio-Cortez’s idea but doubled down on it, suggesting it be applied not just to income but to wealth. Meanwhile, on Fox News, Tucker Carlson delivered a scathing monologue about the dangers of market capitalism.
Americans may think that economic gains are too concentrated, with pockets of prosperity on the coasts and in some urban areas. But compare the U.S. to continental Europe. Europe’s prosperity rests almost entirely on countries and regions (Germany, northern Italy, metropolitan Paris) that have been centers of commercial development for centuries. There are no new clusters of dynamism.
In the U.S., newly competitive regions (North Carolina, Texas, Utah) are constantly emerging. There are many reasons for this, of course. A truly populist platform, instead of focusing on “soaking the rich,” would be looking for ways to encourage and sustain this kind of geographic vitality.