In what might have been an offhand comment, U.S. Rep. Alexandria Ocasio-Cortez, D-N.Y., told an interviewer that a marginal income tax of 70 percent might make sense for people earning more than $10 million a year. The current top rate on earned income, not counting Medicare taxes, is 37 percent. Could it really make sense to almost double it? The idea is unwise — but worth discussing.
Some economists, including respected authorities on taxes and public finance, say 70 percent could be about right. Their logic is simple. They say taking money from the rich to give to the poor makes society as a whole better off. And the evidence suggests a top rate of 70 percent on the highest incomes would be fiscally productive — meaning not so high that the disincentive to effort and enterprise would cause the government to raise less money than with a lower rate.
The principle that taxes should be progressive — raising proportionally more revenue from the rich than from people of more modest means — is almost universally accepted as fair. The current U.S. tax system is already quite progressive, and it could be made more so by closing loopholes that give the rich advantages.
Without comprehensive tax reform, introducing a top rate of 70 percent, or anything close, would vastly increase the profit to be made from lawful tax avoidance, including arrangements that recast income in the form of capital gains.
The U.S. tax code offers countless opportunities for avoidance. Taking this into account, and bearing in mind that over the long term very high top rates would discourage effort and enterprise more severely than most short-term estimates suggest, the rate that gathers most revenue from the rich is probably a lot lower than 70 percent, and maybe not much higher than the current rate.
FROM A BLOOMBERG NEWS EDITORIAL
