01/11/2019

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

Ryan Bourne, Reason

Economic commentators Matt YglesiasPaul 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.

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