AOC, the 70% Income Tax Proposal and why she’s both right and wrong

Some Notes on a 70% Tax and AOC

Let’s see. Top federal rate, 37%. ObamaCare 3.8%. California’s top rate 13.3% (and no useful deduction for the CA taxes, so those three simply add up): 54.1%. California’s sales taxes are around 9% (statewide 7+, but local taxes bring it up as high as 10.25.)

So a top earner takes home 46 cents on the (marginal) dollar, buys something for 42c and sales taxes eat up the rest. Total net tax rate: 58%.

AOC is right – we could raise the rate on the highest earners to as high as 70%, but that’s NOT the same thing as raising the *Federal* rate that much. Several economists have been cited talking about that overall level (around 70%) as reasonable and/or optimal, but pundits and columnists rarely add in State, Local, or sales taxes when considering that “optimal” level compared to where we are now.

Now the part that AOC is wrong about: (a) since we are talking about only increasing taxes by about 10-12% at the margin on the very highest earners, the revenues it would generate are really nowhere near the size you’ll see her cite. and (b) pretending that people don’t respond to incentives — ie. that the money raised by that tax change would be a simple static analysis — is also silly.

So she’s both not as absurdly wildly out of the field as the right says. But she’s also — and this seems to be a habit for her, as she’s done it in other contexts, too — she’s wildly out of line on how much you could really expect to raise by following her prescription.

And a note about historic top marginal rates of 70% — during those times, there were vastly more write-offs (ie. 100% of interest — including auto, credit card, mortgages, etc — and vastly more loopholes.)

Moreover, state and sales taxes were uniformly much much lower.

Folks love to talk about how Reagan lowered rates. He did. But it was in conjunction with closing out a *lot* of loopholes.

Finally, regarding the alleged problem of undertaxing unearned income (dividends and capital gains) with the current top federal rate of 20%:

That’s misleading, too. Again, ObamaCare 3.8%. And CA has no lower CapGains/QualDiv rate — so 13.3%.

So no, not 20%. 37.1% already (for high earners in CA — home of many of the very highest earners in the country).

Moreover, particularly for the QualDivs — that’s income that has *already* been taxed at the corporate level. The reason it gets that lower rate is specifically because it’s double-taxed. If you want to talk about eliminating the corporate taxes completely (or making div payouts deductible against corporate earnings but keeping the corp tax for retained earnings) and making QualDivs taxed as ordinary income, that’s an interesting conversation to have.   And in fact, may make sense — taxing divs as ordinary income means they are taxed much more *progressively* so rich folks pay higher rates and poor folks pay lower rates.

There may well be an argument for raising some of these rates — but bear in mind that it’s rarely as simple as anyone likes to make sound bites out of.

Raising the QualDiv rate but ignoring the double-taxation doesn’t make sense.

And raising the CapGains rate has very clear and obvious consequences since those are generally under the control of the taxpayer — if the rate is too high, they simply don’t sell assets. There are step-up basis if they hold until death, the ability to borrow against assets rather then sell them, etc.