The Optimal Tax | Dollars & Sense

Source: The Optimal Tax | Dollars & Sense

Up Against the Wall Street Journal

The Optimal Tax

Mainstream economics supports a 70% top income tax rate.

BY JOHN MILLER | May/June 2019

This week Paul Krugman leapt to the defense of Democratic freshman Rep. Alexandria Ocasio-Cortez’s idea of paying for a “Green New Deal” with a 70% marginal tax rate on the incomes of top earners.

Mr. Krugman cites a 2011 paper by Peter Diamond and Emmanuel Saez, based on a variety of extrapolations, [which] calculates that the “optimal” top tax rate is 73%. Case closed? Not even slightly. Messrs. Saez and Diamond are describing a world in which the wealthy have no opportunity to shield or hide their incomes.

Politicians may find it politically handy to be seen dinging the rich. The net result isn’t more revenue. It’s more efficiency-inhibiting economic distortions.

—Holman Jenkins, “High Tax Rates Aren’t Optimal: Nobody Really Thinks a Top Rate of 70% or 80% is a Good Idea in the Real World,” Wall Street Journal, Jan. 8, 2019.

We have been down this road before. In the 2016 presidential election Bernie Sanders proposed a top income tax rate of 70% to reduce our ever-worsening levels of inequality and help to finance social programs that would support those left behind by today’s economy. In response, a cavalcade of economic commentators lined up to denounce Sanders’ proposal as socialist lunacy sure to bring on an economic disaster.

But that’s not at all what the historical evidence shows. Sanders suggested as much when he quipped that he hadn’t proposed a 90% top income tax because “I’m not that much of a socialist compared to Eisenhower.” Economist Paul Krugman made the same point in his New York Times column that Wall Street Journal columnist Holman Jenkins found so objectionable: The top income tax bracket in the United States was higher than 70% “for 35 years after World War II—including the most successful period of economic growth in our history.” But Krugman’s defense of Rep. Alexandria Ocasio-Cortez’s (AOC’s) proposed 70% top income tax rate to help finance a Green New Deal did not stop there. He invoked the “optimum” income tax rate—a concept firmly entrenched in the canon of economic tax literature. As I explain below, calculations of this optimum tax show that the U.S. income tax could be highly progressive with a top income tax rate of 73% or higher without reducing government tax revenues.

That’s what really got Jenkins’ goat. To see why the optimal top income tax rate is as high as 70%, and probably higher, despite Jenkins’ objections, we’ll need to unpack some of the economics tax literature.

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This article is from the
May/June 2019 issue.

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