Economy & Business

Why 70 Percent Tax Rates Cannot Finance Socialism

Democratic Representative-elect Alexandria Ocasio-Cortez talks to reporters in Washington, D.C., November 14, 2018. (Carlos Barria/Reuters)
There’s no way to raise the money without hammering the middle class.

Representative Alexandria Ocasio-Cortez’s call for a 70 percent income-tax rate to finance green-energy initiatives has energized the Left. Yet this is completely destructive proposal. A 70 percent tax bracket would raise very little (if any) revenue, while damaging the economy and sending income and jobs overseas.

While details of Ocasio-Cortez’s energy proposal are unavailable, former Green-party presidential candidate Jill Stein has proposed a “Green New Deal” costing between $700 billion and $1 trillion per year for public jobs and clean energy initiatives. That is roughly 4 percent of GDP.

And when assessing the needed tax revenues, a green-energy initiative costing $7–$10 trillion over the decade should be examined in the context of $42 trillion in additional Democratic-socialist proposals that include single-payer health care ($32 trillion), a federal jobs guarantee ($6.8 trillion), student-loan forgiveness ($1.4 trillion), free public college ($800 billion), infrastructure ($1 trillion), family leave ($270 billion), and Social Security expansion ($188 billion).

That 21 percent of GDP cost would double federal spending. And that does not even account for a baseline budget deficit rising to 7 percent of GDP over the decade — bringing the total budget gap to 28 percent of GDP.

Even if taxing the rich could finance a Green New Deal costing 4 percent of GDP — which I will show is not possible — that would use up all the plausible upper-income tax hikes that could otherwise address the remaining baseline deficits and new liberal spending initiatives that total 24 percent of GDP (an annual budget shortfall of $5 trillion in today’s dollars). The middle class would have to pay that remaining tab.

These spending promises are so stratospheric as to be incomprehensible — except to the far Left, which clings to the myth that simply taxing millionaires can finance a level of socialism that would make the Swedes start a tea-party movement.

Let’s begin with the absurd: a 100 percent tax rate on all income over $1 million. Analysis of IRS data shows that this would raise 3.8 percent of GDP — not even enough to balance the current budget, much less finance a Green New Deal. And even that figure implausibly assumes that people continue working and investing. Slightly more realistically, doubling the top 35 percent and 37 percent tax brackets, to 70 percent and 74 percent for singles earning more than $200,000 and couples earning at least $400,000, would raise roughly 1.6 percent of GDP. That figure also ignores all revenues lost to the economic effects of 85 percent marginal tax rates (when including state and payroll taxes) as well as tax avoidance and evasion.

Representative Ocasio-Cortez floated the idea of limiting the 70 percent tax bracket to incomes over $10 million. My analysis of IRS data shows this would raise only 0.25 percent of GDP — about $50 billion annually — in part because nearly half of the income earned by these 18,000 filers comes in the form of capital gains that would be left outside a 70 percent tax on salary income.

Even $50 billion is surely too high of an estimate, because the kind of people with incomes over $10 million also have teams of accountants and tax lawyers finding every conceivable tax loophole and overseas income shift.

Yet it is not just about income-tax loopholes. Super-wealthy families often keep their wealth in the form of investments and other assets that can be converted into taxable income on their own schedule. Jeff Bezos may be worth $160 billion, but in 2017 he reportedly paid himself an annual salary of just $81,840, with total compensation (including deductible expenses) of $1.6 million. Taxing 70 percent of all salary and wages above $10 million (or even $1 million) would not even touch the Amazon founder.

Realistically, additional income and payroll taxes on families earning $400,000 or more could raise at most 1 or 1.5 percent of GDP.

So, let’s move outside the income tax. Popular liberal proposals to impose a 30 percent minimum tax on “millionaires” and to more aggressively tax banks, hedge-fund managers, and oil and gas companies would raise a combined 0.1 percent of GDP, according to CBO data. Doubling corporate tax rates would add 0.7 percent of GDP until the entire Fortune 500 moves its headquarters to the Cayman Islands or Ireland.

This pushes the full “bludgeon the rich” revenues to around 2 percent of GDP, or about $400 billion per year. Still not nearly enough for a 4 percent of GDP Green New Deal (or the rest of the liberal wish list plus deficit reduction).

A common liberal retort is that the economy survived 91 percent income-tax rates under President Eisenhower and 70 percent tax rates through the 1970s. That does not mean those policies raised much revenue. Tax exclusions and high income thresholds shielded nearly everyone from these tax rates — to the degree that the richest 1 percent of earners paid lower effective income-tax rates in the 1950s than today. In 1960, only eight taxpayers paid the 91 percent rate. Overall, today’s 8.2 percent of GDP in federal income-tax revenues exceeds that of the 1950s (7.2 percent), 1960s (7.6 percent), and 1970s (7.9 percent). Those earlier decades were not a tax-the-rich utopia.

Not a single country in the OECD has a 70 percent tax bracket. Indeed, America’s top combined income- and payroll-tax rate already exceeds that of England, Germany, and Norway, and is only 7 points below that of France. Europe finances its generous welfare states through steep value-added taxes that hit the entire population.

And like its counterpart in Europe, the American middle class would have to fund socialism because it earns most of the national income. The top-earning 5 percent of families and pass-through businesses currently account for 30 percent of all income. That means that 70 percent of this tax base comes from those outside the top 5 percent. Furthermore, that top 5 percent already pays 42 percent of all federal taxes, including 61 percent of all federal income taxes, which leaves less room for additional taxes.

Increasing federal spending by 21 percent of GDP to fund Democratic socialism — even after slashing defense — would require either a 55 percent payroll tax increase, or 115 percent value-added tax, according to CBO data.

Acknowledging this brutal middle-class burden would immediately end any public flirtation with “free-lunch socialism.” Which is why the Left refuses to move beyond “tax the rich” talking points and actually lay out a specific, comprehensive proposal of spending and tax increases. If the numbers added up, the Left would have produced them.

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