Here’s how Ocasio-Cortez’s tax plan on rich would work
Rep. Alexandria OcasioCortez, D-New York, floated a 60 percent to 70 percent tax rate on the richest Americans in an interview with CBS News’ “60 Minutes” that was released Friday, arguing higher taxes on multimillionaires could help pay for the “Green New Deal” she and other left-wing members of the Democratic Party have proposed.
Talking to Anderson Cooper, the new House member suggested the new tax rate apply to Americans earning more than $10 million a year, noting that similar rates existed in America a few decades ago.
The top tax rate was above 90 percent during the 1950s, and while it has slowly descended, it remained as high as 50 percent for much of President Ronald Reagan’s tenure in the 1980s.
American households that earn more than $600,000 annually currently pay a 37 percent tax rate, down from the 39.6 percent rate they paid before the Republican tax law passed in 2017.
Conservatives have pushed for lower taxes on the rich as a spur to economic growth, while liberals see potentially untapped revenue that could fund their key social spending priorities, such as Medicare for all and free college tuition.
“There’s an element where, yeah, people are going to have to start paying their fair share in taxes,” Ocasio-Cortez told “60 Minutes.”
How much revenue could new taxes on the rich really raise?
We looked at the numbers, enlisting the help of a number of tax experts, including Mark Mazur, a former Treasury Department official now at the Tax Policy Center, a centrist think tank; Joel Slemrod, a tax expert at the University of Michigan; and Ernie Tedeschi, an economist who served in President Obama’s Treasury Department. • 1. $720 billion/decade (Ocasio-Cortez’s suggestion for nearly doubling taxes on people earning more than $10 million):
In 2016, the latest year for which government data is available, approximately 16,000 Americans earned more than $10 million each. These are not in fact “the 1 percent” many on the left like to talk about — they are a much smaller slice, fewer than 0.05 percent of all U.S. households.
It’s difficult to estimate precisely how much more in taxes the government could wring from this ultra-elite. Collectively, their total taxable income amounted to $405 billion in 2016, and they paid about $121 billion in federal income taxes. They also face state and local taxes, which raise their overall tax burdens.
As she noted to “60 Minutes,” Ocasio-Cortez’s idea for a 70 percent tax rate on those earning more than $10 million would only kick in beyond the first $10 million in income. So, this new tax rate would do nothing to add to the amount of federal revenue on the first $160 billion (16,000 people multiplied by $10 million) in taxes this group paid.
But that leaves about $244 billion in taxable income for those earning more than $10 million a year. If this entire pool was taxed at 70 percent instead of the 39.6 percent they paid in 2016, the federal government would bring in an additional $72 billion annually - or close to $720 billion over 10 years, according to Mazur. The real number is probably smaller than that, because wealthy Americans would probably find ways around paying this muchhigher tax.
“You’d certainly see some people under that system change their behavior to avoid the higher rate, which could significantly impact how much revenue it generates,” Mazur said • 2. $3trillion/decade (A wealth tax on the top 1 percent similar to those in Europe):
The American government currently raises tax revenue primarily through payroll taxes and income taxes, and gets a smaller chunk from estate taxes and corporate taxes. It has not adopted a kind of tax that exists in some European countries: a wealth tax, wherein the federal government takes a chunk based on household wealth rather than income.
Norway, for instance, in 2016 taxed at a rate up to 0.70 percent for all wealth over $162,568. France’s wealth tax in 2017 hit assets above $1.4 million.
Slemrod, of the University of Michigan, said in an email that the wealthiest 1
percent of Americans own roughly one-third of the $107 trillion in wealth in America. This group collectively holds about $20 trillion in wealth above $10 million per household.
From there the calculation of wealth tax is simple: a 1 percent wealth tax on the wealthiest 1 percent of households above $10 million could raise about $200 billion a year, or $2 trillion over 10 years. Tedeschi, the former Obama official, found a 0.5 percent wealth tax on the top 1 percent could raise at most $3 trillion over 10 years.
But this, too, would probably change Americans’ behavior and perhaps lead them to try shifting their wealth overseas, and the economists say the actual amount of revenue is likely lower than their estimates suggest. And this is assuming there are no exemptions to what is considered wealth, such as housing assets.
• 3. $3trillion/decade (Doubling income taxes on the top 1 percent):
In 2012, the economists Peter Diamond of the Massachusetts Institute of Technology and Emmanuel Saez of the University of California at Berkeley published a paper arguing the optimal top tax rate is 73 percent. In 2018, that would raise the tax rate on income above $600,000 from 37 percent to 73 percent, but back then it meant increasing the top rate from 39.6 percent to 73 percent.
The IRS says Americans earning more than $600,000 annually compose the richest 0.9 percent of families, so we’ll use that for shorthand for the 1 percent.
In 2016, this richest 0.9 percent earned about $1.7 trillion in taxable income and paid about $530 billion in taxes.
These Americans would have to pay an additional $320 billion every year in taxes if the top tax rate went up to 70 percent, according to calculations based on IRS data. Mazur, the former Treasury official, noted this estimate was probably high because the wealthy would probably find ways to try to shelter themselves from higher taxation, such as by buying tax-exempt bonds.
Other economists found similar results. Tedeschi, the former Obama economist, put the number at about $300 billion annually.