On Wednesday’s episode of The Gist, Mike Pesca spoke with the New Yorker’s Adam Davidson about Alexandria Ocasio-Cortez’s idea that America’s highest earners should have a marginal tax rate of 70 percent. A transcript of their conversation, which has been edited and condensed for clarity, has been reprinted below.
Mike Pesca: Alexandria Ocasio-Cortez injected the idea that maybe we should have marginal tax rates of or approaching 70 percent. The intellectual underpinnings of this idea was a paper that came out a few years ago by Peter Diamond and Emmanuel Saez, and they decided 73 percent would be a good rate. It’s about twice as high as the highest tax rate on the federal level now. What do you think of it?
Adam Davidson: There are a few ways to think about taxation. A lot of economists talk about tax efficiency or tax optimization, and that framework is very mechanistic. It’s simply saying, all right, there’s a country, and there’s economic activity in that country, and there’s a government that needs funding. What is the way to fund the government so that it has the least impact on the economic activity? If there are values there, they would be: We don’t want citizens and business owners spending a lot of time thinking about tax policy, going into some businesses because there’s a tax advantage, or leaving other activities because there’s some negative tax implication.
You don’t want the tax rules warping the optimal way to organize society.
Exactly—and for a whole host of reasons, including that that creates corruption. The oil and gas industry gets a lot of tax subsidies. Those make us poorer overall, those reward people not for adding productive goods and services to our economy but for just being able to lobby the right politicians to get a tax rate this way and that. In the long term, if you have an economy that’s largely driven by government fiat, making tax policy out of a lobbying process, you’re just not going to get as good an economy as you are compared to if people are making their own choices based on what will succeed or fail in the marketplace.
From a tax efficiency standpoint, there’s actually fairly little distance between left-leaning and right-leaning economists.
If I remember correctly, it might be off by a tiny amount, but it was like Mitt Romney’s top marginal tax rate was 34.6 [Editor’s note: 28], Obama’s was 39.6. So we’re talking about pretty small differences that somehow were turned into the difference between tyranny and freedom. I’d say most economists do believe that poorer people should not only pay less tax, but they should pay a lower percentage of their incomes and that below some income level, poor people shouldn’t pay any tax at all and could even, as we do, have an earned income tax credit, where they’re actually paid money.
Under that rubric—and they run these mathematical models with artificial intelligence and machine learning, etc.—there’s something called the effective tax rate, which is basically: How much did you actually spend as a percentage of your income? You rarely get a tax rate above 30 percent, 28 percent, 30 percent. Again, this is with very few or no deductions.
We want to use the tax code to encourage certain actions.
And as a general rule, everyone likes the tax deductions they get and is against the tax deductions they don’t get.
So why would you want to get all the way up to 73 percent? What would be the reason? It certainly creates distortions. When there’s a marginal tax rate of 73 percent, very, very few people actually pay that, and that was true in America when we did have a marginal tax rate even higher, first of all. Second of all, there’s just not a lot of people who make $10 million a year. So even if you taxed them at 100 percent, it’s just not that much money because there’s so few of them.
It’s not going to really solve a lot of fiscal problems. It’s not going to dramatically increase the amount of money coming into the government.
Proponents say it would create the opportunity to have Medicare for All.
Oh no, it’s not even a tiny fraction. You’re literally talking about a drop of water versus an Olympic-sized swimming pool. The numbers are so wildly out of whack.
People seem to gloss over the fact that, except for a few states, people also pay state tax and often local taxes. There was this example going around of how much The Rock (the actor) would pay, and I guess they were trying to point out it wouldn’t be 70 percent of all his income. It would only be 70 percent of the income over $10 million, and the ultimate lesson was, Oh, look at how many millions he would still have. However, since he’s a California resident making a lot of money, a lot of it gets taxed at 13.3 percent.
So if the rate is 70 or 73 percent, he’s paying about 86 percent in taxes. Not only are their calculations off, but at a certain point—and I would think around 86 percent would be that point—he’s just going to turn down projects.
Or he’s going to do them in another country, where they’re different.
Sure, he’s not going to make that 65 percent, if anything over $10 million will be, “Oh, instead of your $8 million payday, it will literally be a $1 million payday.” He is not going to do that for a $1 million payday! That’s distorting, I think would be the word that an economist would use.
It’s a huge disincentive, and it distorts how the economy works.
The big issue, and this is something Saez and Diamond talk about, is we don’t have a global tax system, so you can relocate to another country, and countries can compete to attract wealthy people. We saw this with Gérard Depardieu saying he’s going to move to Russia for tax reasons.
Steven Seagal just did it for artistic reasons by the way.
The classic example is Jamaica, where Michael Manley, the prime minister in the ’70s, said, “We’re going to tax millionaires very heavily, and for any millionaire who doesn’t like that, there’s three planes a day to Miami,” or something to that effect. And they took him up on it, and Jamaica is no question a poorer country.
Now that doesn’t then mean, “Oh, so we have to do whatever the rich want because I’m afraid they’re going to leave.” And I tend not to be for pro-rich policies, and I would like tax rates higher, but I think, as a rule of thumb, certainly when you get above 50 percent as the marginal tax rate, you’re really pushing people away. And that’s the full marginal tax rate, so that would include state and local taxes.
This is why it’s always been compelling to me.
The Republicans will always argue, whenever you want to raise taxes a bit, “You’re going to disincentivize work.” And they do a lot of studies on this, and it shows that you’re not going to disincentivize work from a highest federal tax rate of 35 to 39 percent. But, as you say, once you get over 50, you might, and back when the tax rate was 94 percent, of course it disincentivized work.
I remember interviewing and reading the biography of Johnny Carson’s accountant and lawyer, Henry Bushkin. And he would talk about how there were all these opportunities that Carson had and he just didn’t want to take him up on them because he was getting taxed at the time at 94 percent. So of course he added less wealth to the economy.
Another really good compelling argument is: A lot of times there’ll be a very rich person, and he might be married or she might be married, but almost always he might be married to someone who wants to be a teacher. But once you start filing jointly at 90 percent, do you really want to go and be a teacher for $13 a week?
Yeah. What seems like a more radical idea but is probably more economically sound—but in an American context is super radical—is taxing wealth. Income is what I make this year. Wealth is what I have.
Is that doable, literally?
Technically doable. It’s tricky. You’re literally looking at your computer and, like, how much value is left? It’s kind of beat up—is there $800 left? $300? So there’s tricks and issues you’d have to face because it’s not just money in the bank; it’s how much actual wealth you have—how much silverware you have, how many nice paintings you have. It’s a costly process to assess.
Of course, the problem is that a wealth tax would be created like any tax: through a political process that is overly dominated by the wealthy. So it is very hard to conceive of, but if I had Alexandria Ocasio-Cortez’s platform, I feel like the thing I’d be lobbying for is a wealth tax.
Wealth inequality is a huge problem.
Wealth inequality might be the problem.
How much of that problem is because of a screwed-up tax code? How much of that problem can be solved with anything related to taxes?
I think taxes are the main tool, and we know famously there’s racial disparity and gender disparity in income. Wealth, especially multigenerational wealth, is a similar problem in which there are extreme racial and gender differences, but it’s a different sort of problem. A lot of intergenerational wealth is not Bill Gates deciding whether to leave billions of dollars to his kids.
But if you’re in a world where you’re going to get, say, $35,000 when you’re 28, and that allows you to put a down payment on a home or to go to graduate school or to start a business … it sets you off on a totally different kind of income and wealth dynamic that will then transfer to your children and their children.
And you want to take that, Adam? You want to take that $35,000 and make it $32,500 with your tax?
I do. Because, to oversimplify our economy, the shot we got at “being good for everybody” is growth, even though some people don’t like the word growth in an economic context. That doesn’t mean bigger buildings or faster cars. It simply means we know how to do more stuff. There’s more stuff out there, and that stuff comes from people thinking up new ideas, people making better products or making the same products cheaper. Growth is more like knowledge than things, and that’s our shot. If someone else wants to come up with another shot, OK, but right now that is the economy we live in.
If you want your life and your children’s lives to be better, and you want your neighbor’s life to be better in the future, that comes from growth. And having some significant percentage of economic activity focused on preserving wealth is the opposite of growth. It is holding on. It’s preventing growth. It’s stopping forward momentum.
And they start manipulating government. They start lobbying for their position. They start putting their cronies in power, etc. I think we clearly see that. The Trump administration is almost a comically extreme version of it, where you have someone who inherited his wealth, squandered much of it but kept enough, and hired a bunch of other people, many of whom inherited wealth, in order to make America even better for people who inherited wealth. It’s a very bad system.
I mean, my wife’s great-grandfather invented something called the Banbury mixer.
Oh, sure, DJs everywhere use it!
No, no, no, it’s crucial in the rubber industry. It mixes rubber in a very special way that I don’t understand.
I’m thinking of a different one.
And his son, my wife’s grandfather, never worked a day in his life. Now to my great frustration, he, I think, spent his last dollar on the day he died, so I’m not benefiting from that. But we don’t want an economy filled with people who don’t have to work or whose work is preserving the wealth that their great-grandfathers made. That’s a bad economy. And so I don’t think income tax is the best. I think it’s crucial, and I’m for an income tax, but I think wealth tax is where it’s at.
We’re going to have 20 people running for president on the Democratic side. If one of them said “wealth tax,” would your ears perk up, and you’d maybe give that person an extra hard look?
Yes. Combined with the fact that obviously I’m a political realist, and I know, oh, OK, that person is definitely not going to be president.
You really think so?
Preserving the wealth of very rich people: That’s our thing. I think you would lose a lot of the Democratic fundraising people, and I think there’s a lot of not-rich Republicans who, for a whole host of complex reasons, have adopted an anti-tax view as some kind of moral core.
Like how estate tax polls poorly, even though it helps almost everyone and hurts almost no one.
Exactly. So I think wealth tax would be tough.
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