Higher marginal tax rates on the rich have coincided with good times in America. Tax cuts are a key culprit in inequality.
When Rep. Alexandria Ocasio-Cortez proposed a 70 percent tax rate on the richest Americans, hysteria followed on the right — and confusion in a fair portion of the media. Billionaire presidential candidate Howard Schultz, I-Sonics, condemned it and said the views of one of her advisers are “un-American.”
In fact, high marginal tax rates on top earners are as American as apple pie, pizza and cheese-and-onion enchiladas.
First, an important clarification. A 70-percent marginal tax rate doesn’t mean 70 percent of a high earner’s income goes to Uncle Sam — or to “leftist fantasy programs,” as GOP Rep. Steve Scalise put it.
Instead, people are taxed at different rates as they cross the threshold of each tax bracket. Today the United States has seven brackets, the highest being 37 percent. But (simplifying to postpone your nap time) you only pay that top rate on the extra dollars that rise above that level. Otherwise, you’ve been taxed at lower rates all the way up.
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On 60 Minutes, Ocasio-Cortez put it this way: “Once you get to the tippy-tops, on your $10 millionth dollar, sometimes you see tax rates as high as 60 percent or 70 percent. That doesn’t mean all $10 million dollars are taxed at an extremely high rate. But it means that as you climb up this ladder, you should be contributing more.”
The top-of-the-ladder folks paid high marginal rates for much of the 20th century. It was 91 percent under Republican President Dwight Eisenhower in the 1950s.
Democrat John F. Kennedy campaigned on a tax cut to stimulate the economy, which finally became law after his assassination. The top rate after that cut was 70 percent, where it mostly stayed until the election of Republican Ronald Reagan in 1980. He also pushed for lower rates, so the highest bracket fell to 50 percent.
It fell again to 28 percent in 1988 but was raised to 39.6 percent during the Clinton administration in the 1990s.
Since then, the highest rate on the wealthiest has slightly yo-yo’d, depending on Republican (cut) or Democratic (raise) control. But 70 percent is hardly un-American or radical.
Indeed, economists Thomas Piketty of the Paris School of Economics, Emmanuel Saez at the University of California-Berkeley, and Stefanie Stantcheva of Harvard endorse an even higher rate. Today the United States ranks 39th in top marginal rates.
Some broad brush strokes accompany the rate changes.
The high top tax rates coincided with the best years of the nation’s middle class. Every group of American earners saw their incomes rise. Inequality was lower. The federal government invested heavily in science, infrastructure, low-income housing and education. The economy grew strongly.
But that’s not the whole story. The parting of incomes began not under Reagan but in the mid-1970s. The causes are still debated, but included oil embargoes, along with slow growth and high inflation (“stagflation”).
Reagan promised a different approach, but this, too, is more complex than comic-strip history.
While Reagan’s tax cuts probably didn’t raise any more money than had Jimmy Carter won re-election, deregulation by Reagan (and Carter) unleashed a massive restructuring of American industry.
A huge assist came from Paul Volcker’s Federal Reserve, which defeated high inflation with a painful recession. The upturn of the business cycle was goosed by mergers, the rise of the tech sector and, especially, the arms buildup against the Soviet Union.
The result was the longest economic expansion in American history. Until it was eclipsed by the 1990s boom under Bill Clinton’s higher tax rates. Clinton’s increase didn’t kill the economy, as critics warned.
Yet not all was well. Most Americans saw their income stagnating or growing very slowly (except for a small time late in the 1990s). This was a sharp difference from the late 1940s through the mid-1970s.
Tax cuts on the rich — including capital gains and estate taxes — are at least partly to blame.
Higher taxes on those at the top mean they pay a larger share of their income than less affluent households. They have less to use in the Wall Street casino, which often involves making money by moving money around, rather than creating enterprises that hire people. They make much of their incomes from investments, rather than wages, and stock prices often depend on cutting employment, holding down paychecks for workers that remain and making job-killing mergers.
The Trump/GOP tax cuts also remind us how such rate reductions do little for economic growth. A Bloomberg analysis found that the stimulus was minimal (while the effect on the deficit and debt was huge). As Bloomberg’s Tim Mahedy wrote, “It’s not that tax cuts don’t matter. It’s that they don’t matter much.”
And that’s just the view from gross domestic product. Tax cuts also bring opportunity costs: The federal investments that don’t get made, the jobs that aren’t created, the wider public good from research and spending on health and schools that never happens.
One can’t blame tax cuts on the rich entirely. Endless wars, purblind globalization, union busting, deregulation, lack of antitrust enforcement and the political influence of the wealthy have all led to a less equal, less opportunity-filled America. Technology advanced and many were left behind. And things happened outside the realm of domestic politics, such as the economic rise of other nations.
Still, today’s extreme inequality is causing a backlash. It’s not only from some on the Democratic left. Polls show at least 70 percent of respondents support raising taxes on the wealthy.
As with the Green New Deal to address climate change, a tax increase stands little chance of becoming reality even with an Elizabeth Warren or Bernie Sanders presidency. That’s because red states may control the Senate for many years. About 25 Republican-majority states have less population than LA County. But California has only two senators; those red states have 50.
Still, many years is not forever. Politics is fluid at times of fear and discontent. Pendulums swing. And people such as Jeff Bezos and Bill Gates would still be very rich, but a little less so. History shows the economy won’t be worse off — and might be much better.