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Talk of the town.
LESS THAN YOU MIGHT THINK

In theory, how much could Alexandria Ocasio-Cortez’s 70% tax rate bring in?

By Natasha Frost

It’s being touted as the policy that might solve climate change, put the rich in their place, and get the US on track to being a haven of egalitarianism and opportunities for all. In an interview with CNN’s Anderson Cooper, Rep. Alexandria Ocasio-Cortez, a Democrat from New York, proposed a 70% tax rate on earnings over $10m, sparking dozens of think pieces and critiques and thousands upon thousands of tweets.

On the left, it’s been applauded. On the right, it’s been widely critiqued and even ridiculed. But theoretically, how much could Ocasio-Cortez’s top tax rate actually raise—and how much difference would that make to the lives of ordinary Americans?

Even under the best possible circumstances, the numbers may disappoint.

According to figures from the Social Security Administration, just 3,755 Americans earned more than $10 million in salary in 2017, for total earnings of around $82.47 billion. Under Ocasio-Cortez’s plan, their earnings over $10 million—some $44.92 billion—would be taxed at 70%, rather than the present 37% rate for all earnings over $500,000 a year.

If this rate were adjusted to 70%, the IRS would receive an additional $14.8 billion each year from this tippy-top 0.0007% of all earners—at the absolute most. (This assumes she would only be raising taxes for earners over $10 million, as mentioned in the CNN interview, rather than a gradual increase for all high earners.) 

It sounds like a lot, but an extra $14.8 billion a year in government coffers would make very little difference to America’s economy. It’s less than the US spends on NASA, for instance, and only around 2% of the present military budget. If it were given out to Americans as a cash payment, each person would get just $45.50.

At present, the federal budget is at $4.4 trillion, with a $985 billion deficit anticipated for Oct. 2018 through Sept. 2019. This extra income would scarcely make a dent in that sum.

There are small projects that it could pay for—Trump’s wall, for instance, or bolstering the National Endowment for the Arts—but it would be hard to launch the kind of plans Ocasio-Cortez has alluded to in the past, including tuition-free public college or Medicare for All. (Those comes with eye-watering price-tags of $47 billion and $32.6 trillion, respectively.) Without a figure for her Green New Deal, it’s impossible to say how much of it these extra funds could cover.

But there’s another problem: there’s practically no chance that these earners would ever pay that much tax. Beyond the fact that these calculations are extremely rough, the super-wealthy can usually afford killer accountants to ensure that many pay far less tax than they probably ought to.

In the 1950s, people earning over $200,000 a year (around $2 million in today’s dollars) were taxed at 90% on these very high earnings. There were likely only about 10,000 people affected, and many found ways not to pay the tax they owed. Reintroducing a similarly high rate would likely have the same effect, further cutting into that $14.8 billion figure. The final number, therefore, might be half or even a third of the total. (This may, as the Guardian notes, be an argument for closing some of these fiscal loopholes.)

For now, at least, many of the people Ocasio-Cortez would probably like to include in this bracket simply aren’t part of it. That’s because Americans who earn more than $10 million a year via earnings from private equity or hedge funds pay taxes on it at a far lower rate, as it’s considered to be “carried interest.” No matter how great the sum, they pay just 15%, rather than the 37% often described as the uppermost tax bracket and reduced from 39.6% by US president Donald Trump. The 3,755 figure does not include them. It’s not clear how many of them there are, though their numbers may include such rich listers as Warren Buffett, who earns a $100,000 salary but has assets of nearly $88 billion.

It may be that Ocasio-Cortez hopes to completely rewrite how America organizes its taxation, in order to catch these savvy investors. At the moment, all we have to go off is a chance comment made in an interview, which is all she’s said on a proposed tax change. Changing how carried interest is taxed, however, would necessitate a tax overhaul of the likes America has seldom seen—and likely be met with rampant opposition from Republicans and some Democrats alike.

That’s not to say that there’s no reason to tax the rich at a higher rate than we do at the moment—just that this may not be the best solution. As Slate reports, effective tax rates on the top one percent are down by about 6% from the 1950s—even as the wealthy earn a much larger share of the national income. Raising the highest tax rate could help to adjust that. There may be a psychological advantage, too: Economists such as Thomas Piketty suggest high tax rates for the super-wealthy may ease income inequality by discouraging high-flying CEOS and their ilk from asking for such inflated salaries.

A more effective way to raise revenue could simply involve upping the rate by a few percent on earnings between $500,000 and $10 million. Whether it would be as successful in giving the illusion of “soaking the rich” is another question.