A Top Marginal Tax Rate of 70% is Not Radical

Congresswoman Ocasio-Cortez has proposed a top marginal tax rate of 70%. The top marginal tax rate is currently 36.7%. Mitch McConnell retorted saying such a radial proposal will never be accepted.  The proposal is not radical. If one looks at historical top marginal tax rates the current 36.7% is radical, not the proposed 70%. To assail any misconception, under a progressive tax system like the United States has no one would pay seventy percent of their income in taxes if the top marginal tax rate was 70%.  And an often heard complaint of why should someone pay so much of the money they earn over to the federal government fails to ask the question how was the money generated.  Furthermore the increased tax revenue would be used for the good of the nation.

The seventy percent top marginal is not radical. If one looks at the top marginal tax rates the current top marginal tax rate is much more radical than the proposed 70% top marginal tax rate.  From 1931 through 1986 the top marginal tax rate ranged from a high in 1944 of 94% and a low of 50% in 1986. During these 42 years the top marginal tax rate was much higher than the current 36.7%. From 1951 through 1963 the top marginal tax rate varied between 91% and 92%. Beginning in 1962 the top marginal tax rate began to drop with the promise that “rising tides raise all boats”, that is as the rich get richer so does everyone else,  followed by “supply side economics” in the 1980’s with the promise that by reducing the taxes on the wealthy the wealth would trickle down to the average citizen. Given the wealth and income disparity of today these promises did not materialize. (see http://www.taxpolicycenter.org/sites/default/files/legacy/taxfacts/content/PDF/toprate_historical.pdf).

History tells us what effect a high top marginal tax rate has on the economy. From 1951 through 1963 when the top marginal tax rate varied between 91% and 92% the GDP grew on average 3.61% a year. (see http://www.multpl.com/us-real-gdp-growth-rate/table/by-year). Real GDP is, by definition, a measure of the income per person adjusted for inflation. (see https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/).  During the 1950’s and early 1960’s  the federal government had the funds to build the interstate system and the foundations of the space program because of high top marginal tax rates, and during this period of high taxes and spending the economy grew.  So Mitch McConnell’s claim that a 70% top marginal tax rate is radical and would hurt the economy is not factual nor supported by history as is easily seen by examining 1951 through 1963, when there was a very high top marginal tax rate and the economy grew.

What does a top marginal tax of 70% rate mean? It does not mean anyone would pay 70% of their income in taxes. The proposal is to have a top marginal tax rate of 70% for earnings over ten million dollars. This means if a person had a taxable income of ten million and one dollars they would pay 70% on the one dollar.  This person would NOT pay 70% on the ten million dollars.  When a person’s earnings enter a higher tax bracket that person does not pay the higher tax rate on all of their income, only on that income which is in the higher tax bracket, which in this example is the one dollar. This is because the federal tax system is progressive. For the 2018 tax year all single persons pay a 10% tax on income from $1.00 to $9,525.00, 12% for taxable income from $9,526.00 to $38,750.00, etc.  If all other tax brackets remained as these are now and a new one of 70% was added for persons earning over ten million dollars, a person with a taxable income of ten million and one dollars would pay 30% of his/her taxable income for earnings under $500,001.00 and 37% for taxable income  from $500,001 to $10,000,000 and 70% for the $1.00. (see https://www.irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions). So this person would pay overall 36.7% in taxes on the ten million and one dollars and still have over six million dollars to spend and invest after taxes.

But a complaint can be heard,  “why should a person pay so much of his/her money in taxes”.  A person who has taxable earnings over ten million dollars most likely did not earn this money through his/her own skill and labor but through ownership. Most likely the ten million dollars was generated from the ownership of income producing property where others were providing the labor and some of the skills. So to say the money is owned by the taxpayer misses the effort and contributions others made for the individual to have a taxable income over ten million dollars. Also the owner/taxpayer benefits from our legal system.  In the United States our legal system rewards ownership much more than labor and skill.  The person who has a taxable income over ten million dollars benefits from rewards of ownership the United States’ legal system provides. The legal system also provides protection of ownership, ensuring others can not take tangible or intellectual property of the owner/taxpayer, for their own use.  The legal structure also provides a structure to resolve business disputes.  In addition to the legal structure the transportation and communication systems in the United States, which the owner/taxpayer certainly used to generate the income, is provided for by the government through taxes.  

The answer to the complaint is the taxpayer did not generate the income on his/her own others provided the labor and skill. The taxpayer/owner also enjoyed the use of the transportation, communication, and legal systems in the United States. So the taxpayer who has earnings greater than ten million dollars benefited greatly from others and from the legal, transportation, and communication systems in the United States and should pay for these significant benefits through significant taxes. And n doing so the economy will not suffer as demonstrated throughout the 1950’s.

The proposal for use of the increased tax revenue from a top marginal tax rate of 70% is to fund a Green New Deal. The Green New Deal would make significance efforts to de-carbonize the United States and to use the tax revenue to invest in research, development and implementation of alternative energy sources. The details of a Green New Deal are for another article. But it enough to say that the use of the increased tax revenue from a top marginal tax rate of 70% would benefit the United States as a whole, just as the top marginal tax rate of 90+% during the 1950’s built the interstate system the top marginal tax rate of 70% today could build a healthier and more sustainable future.

Jim Black

Sister Bay