Ocasio-Cortez Tax Proposal Would Restore Progressive Taxation to Ultra-rich

February 11, 2019; Washington Post

In recent discussions about raising income tax rates, Christopher Ingraham in the Washington Post observes, debate has focused on what the top marginal tax rate should be, rather than who it should apply to. And this distinction matters. From 1995 to 2015, for instance, the top one percent saw their share of national income increase from 15.3 percent to 22 percent, a rapid enough increase; however, the top one hundredth of one percent saw their income share more than double—from 2.5 percent of national income to 5.1 percent. This rarified class, of course, is where the nation’s billionaires reside, a group that now holds 11.2 percent of total wealth.

Ingraham breaks down the numbers. “In 2014, for instance, you needed to make about $478,000 to be part of the one percent in the United States. You’d need five times as much income—about $2 million—to make it to the 0.1 percent. And the price of entry for the top 0.01 percent—the one percent of the one percent—was $10 million.” Notably, Ocasio-Cortez’s proposed 70 percent tax rate would only tax incomes in excess of $10 million.

Right now, rates top out once you hit the top one percent. As Ingraham details, in 2014, “the top rate kicked in at about $430,000 for a head of household. Beyond that it didn’t matter how much you made—$430,000, $4.3 million, or $43 million—it was all the same…the progressivity of the US tax system stalled out.”

By contrast, Ingraham explains, “From 1913 until about 1970, the top tax bracket was set well above the one percent income threshold, and for most of that period above the 0.1 percent and 0.01 percent thresholds as well. What that means, practically speaking, is that the tax code was sensitive to the extreme differences you see at the very top of the income spectrum. The top 0.01 percenters were taxed at higher rates than the 0.1 percent, who in turn were taxed higher than the one percent.”

Initially, (except during World War One), income tax rates, while progressive, were low. In the run-up to the Great Depression, even those at the very top paid a low 25 percent, leading to increased wealth and income accumulation at the very top. However, the top rate climbed to 63 percent in the Great Depression—and remained high for decades afterward.

But bracket creep brought about by inflation started to erode progressivity in the 1970s. Then, in 1982, the tax law passed under President Ronald Reagan treated “all income above the one percent threshold the same.” Further tax changes occurred in 1986 (under Reagan again) and in 1993 (under President Bill Clinton), but ultimately what emerged is today’s tax system.

As Ingraham points out, “There’s a big difference between making $500,000 and $50 million a year: You might call it the difference between ‘rich’ and ‘ultrarich.’ But today, the IRS treats those levels of income the same, subjecting them to a 37 percent tax and no more.”

Et voilà—welcome to our nation’s second gilded age! Of course, the factors behind the rise of economic inequality are far more complicated. But as Ingraham notes, tax code changes made it far easier to accumulate vast fortunes, helping usher in the age of the megadonor that affects the nonprofit sector today.

Ingraham notes that,

Many economists believe that several decades of relatively low tax rates on top earners have contributed to the skyrocketing income inequality we observe today. As a 2012 Congressional Research Service report noted, the top tax rate cuts of the postwar decades “appear to be associated with the increasing concentration of income at the top of the income distribution,” while having “little association with saving, investment, or productivity growth.”

Many, including Federal Reserve Chairman Jerome Powell,  have called income inequality the nation’s greatest economic challenge. As Ingraham points out, while not a complete solution, “One way to address inequality would be to raise tax rates at the top of the income spectrum.”—Steve Dubb