One can get to 70 per cent pretty quickly. Perhaps the Ocasio-Cortez plan actually involves a tax cut for some high-income earners.
Crucial factors
Diamond and Saez also consider at what income level this top rate should kick in. The short answer is a pretty high level. Indeed, the authors perform their calculation by making sure that the number of people who pay the top rate is small enough that the impact on those folks can be more or less ignored. There is some complexity involved in this but, being generous to the authors, it would be about $US435,000 ($608,000) per annum in today’s dollars.
Two crucial factors that Diamond and Saez also discuss are tax avoidance and how responsive people’s labour supply is to tax rates. On avoidance, they are uncharacteristically glib, suggesting that avoidance would lead to a lower top rate, but that it is better to crack down on such behaviour. This reminds me of the 16th-century English nursery rhyme “If wishes were horses, beggars would ride,” which incidentally may be the last time tax authorities achieved that kind of enforcement.
As much as Krugman and Ocasio-Cortez might like to point to the high top-tax rates of the 1950s, it is openly acknowledged that nobody actually paid such rates and that the purpose of the high rates was not even to raise revenue for redistribution. As President Kennedy said in calling for lower rates in his 1963 State of the Union address, “our obsolete tax system exerts too heavy a drag on private purchasing power, profits and employment. Designed to check inflation in earlier years, it now checks growth instead.”
This brings us to the central philosophical and economic question underlying all these sorts of calculations – how much do high tax rates deter productive economic activity? There is a long debate about this, and to their credit Diamond and Saez use fairly reasonable labour-supply elasticities.
Innovation and ideas
What they don’t factor in is the notion that what some, perhaps many, top income earners produce is ideas. Consider for a second how much contemporary wealth in society has been generated by innovation and ideas. Think Apple, Amazon, Uber, Intel, Facebook, Google, and on and on.
The key point about ideas is that they benefit not just the inventors, but everyone who uses the idea. They are, in the language of 2018 economic laureate Paul Romer, “non-rival”. The Nobel committee’s recognition of the work of Romer and other “endogenous growth theorists” is itself a direct acknowledgment of how much economic prosperity in the last century has been generated by innovation and ideas.
A recent paper by Stanford economist Chad Jones provocatively suggested that when ideas are included in the analysis optimal top-marginal tax rates might even be negative – ie, we should subsidise innovation. Indeed, we do just that through tax breaks for R&D, the award of patents and so on. Putting a heavy tax on ideas hurts everyone, not just the innovators.
Justice Oliver Wendell Holmes was right when he said, “Taxes are what we pay for a civilised society.” We should, of course, close tax loopholes and we certainly should not let the wealthy avoid taxes only for the rest of society to pick up the tab. But if we want to have an honest debate about the nature of income taxes then we should engage with the facts and sometimes complicated principles involved.
To her great credit, Congresswoman Ocasio-Cortez did just that. It would be nice if the Australian political debate over taxes were similarly sensible and informed, rather than resembling the intellectual equivalent of chimps hurling faeces at one another.
Richard Holden is professor of economics at UNSW Business School.
from A Viral Update http://bit.ly/2sEDxNV
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