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Alexandria Ocasio-Cortez and Taxation: Could Her Plan Work?

Tax reform seems to be on the list of priorities for nearly every candidate for political office. Enter the youngest congresswoman ever elected and internet sensation Alexandria Ocasio-Cortez, who upon entering office proposed a 70 percent top marginal tax rate on the rich, those making over 10 million dollars a year.


First, it is helpful to understand the history of income taxes and what they are intended for. Income tax was established with the 16th amendment and essentially began when the burden of Civil War expenses became too much for the federal government. Since then, the income tax has been repealed, reinstated, and transformed through various changes. The system we have in place now, where employers withhold income tax from paychecks, has been in place since 1943, and is just one of many applications of tax law.


Nearly half of the federal government income comes from income taxes on individuals (47.9 percent in 2017). This of course does not count the taxes that corporations also pay. Many feel that the system is too complex and often unfair. But could a marginal tax rate of 70 percent on the top earners actually work? Here are a few facts to consider.

Marginal Tax Rates Have Been Higher

First, it is important to understand that historically marginal tax rates have been higher for the wealthy. Under Eisenhower, they were 90 percent, and it until President Reagan changed things in 1982, they were not below 50 percent. More recently that rate has been in the mid to high 30 percent range.


The important thing is to understand that the American tax system is a progressive one, so this is not talking about taking 70 percent of anyone's income. In fact, this tax would only apply to the ten millionth dollar and beyond. This is why it is important to understand average tax rates.


Your marginal tax rate is what you pay on the highest dollar you earn, but since you only pay around 12 percent on the lowest dollar you earn, your average tax rate, even if you are in the top 1 percent, was around 22 percent over the last decade or so.


Also, taxes are based on taxable income after deductions, and the top 1 percent will still be eligible for all of these; in fact some would argue they have more deductions to claim than the average middle class American. What does all this mean? This might not mean as much of a change for the ultra-rich as you would think, and their average tax rates might not rise much at all.

Challenges of Monitoring and Compliance

Of course, one of the challenges of any tax changes is monitoring and compliance. How do we know the rich are accurately reporting all of their income? This may seem like a simple thing at first, but often they have income that is not on W-2 forms, and self-reporting is common on certain types of income.


Who wants to pay more taxes? If an individual can legally take a deduction, they will, and a charitable donation that lowers their tax bracket can save them millions. For the most part, taxpayers are honest, but there are gray areas many take advantage of, directly impacting their tax bill. As far as we know, Cortez' plan would not close these loopholes or take away any deductions.


The cost of closer monitoring, investigations, and compliance measures might eat up a large portion of any more taxes collected using those methods. In fact, there have long been doubts about the efficacy and cost of tax audits and whether they actually benefit the federal government.


These are just two of the challenges such a plan would face, and while many economists think it might still work and could raise significant capital, clearly there are challenges.

The Tale of the Numbers

Finally, an analysis of the numbers can be quite complex, but the bottom line is this: Average tax rates might not rise that much at all. The plan would likely have little impact on how hard the rich would work. Many argue the rich worked harder when marginal tax rates were higher. The risk is that it does not simplify tax law at all, and actually makes it a little more complex.


Secondly, the claims that a 70 percent marginal tax rate on earnings above $10 million could bring in $72 billion annually may be a little optimistic. The tax would affect only about 1 percent of households, and with the additional tax deductions (and the ability to deduct a higher percentage of donations), it might just lead to a creative environment for those who wish to lower their tax liability.


Still, there is a lot of economic research that backs up this or a similar taxation plan, and that evidence is hard to ignore when looking at this new proposal.


Is there a clear-cut answer here? Not really. The plan could work, according to some, and could have a minimal impact according to others. Depending on the expert, the answers are not yet consistent. However, one thing is clear: The freshmen class of elected officials are bringing with them a desire to make some serious changes in Washington, and this may be just the first of many proposals.

Posted by jhamilton at February 7, 2019 3:20 PM
Comments
Comment #437809

The rates proposed by AOC are far too low. It should only go through in connection with Elizabeth Warren’s proposal of a yearly 2% tax on household net worth above $50 million, with a 3% rate on net worth above $1 billion. This would affect about 75,000 households, with less than 1,000 exposed to the 3% rate on net worth above $1 billion.

The third part of this should be a 100 year 100% inheritance tax to undo what the reich wing has done over the last 40 years. People in that tax bracket do not have our national interest at heart. They get multiple citizenships and hide their assets in tax havens. There is some international effort to get at the tax havens. The one country that stands most in the way of that is the UK, with all their little islands that they claim are independent for tax purposes.

Posted by: ohrealy at February 7, 2019 5:10 PM
Comment #437816

Alexandria Ocasio-Cortez and Ed O’hrealy are looney toons.
Besides, does it matter if the world is going to end in 12 years?

Seriously though … an income tax rates of 70% ? Or higher ?
Naahhhh … there’s nothing oppressive about that.

Make it 70% and see what happens?
Heck, why not go ahead and raise it 99%, and see what happens?

Perversion of the laws to raise income tax rates to 70% or higher, is legal plunder; a perversion of the laws to legally plunder what others produce.

What is wrong with a flat income tax rate?
Not a flat sales tax, because ALL sales taxes are inherently regressive, so please don’t ever fall for the “flat sales tax scam”, and all the lies that claim people will be taxed more fairly.

After all, a flat tax (e.g. xx.x %) is already progressive in the sense that person#1 who earned $5000, already pays 5 times more than person#2 who earned $1000. Why is that not fair? Why must the rates also be progressively higher?

Unfortunately, for some people, a flat income tax rate is not enough for them!
Some people want to “stick-it” to those more wealthy than them.
Sadly, it is a pathetic attempt to disguise their envy and jealousy as demands for equality.
Hence, socialist extremists want to pass laws (i.e. new tax laws of 70% or higher) for legal plunder; to pervert the laws to do the very thing (i.e. theft) the laws were originally supposed to prevent.

And why is a flat income tax rate (on all types of income) not fair?

Today, why are some types of income taxed at different rates? Why should capital gains be taxed at rates much lower than the wages of a fire fighter or police officer?
Yet, capital gains are taxed at much lower rates than income taxes on wages (not to mention that capital gains are also not subject to social security taxes and medicare taxes as they are on wages).
Therefore, that’s not fair, and that should be changed, so that ALL types of income are taxed an equal flat percentage (only on income above the poverty level; i.e. beyond a standard deduction).

Also, the tax system does not need to be so complicated.
Complexity encourages and hides tax-evasion, and is often by design.

There are many good ideas to simplify the tax system, and make it more fair.
Unfortunately, greed, envy, jealousy, and corruption get in the way.
Unfortunately, the government is where good ideas go to die.

Posted by: d.a.n at February 7, 2019 11:12 PM
Comment #437828

A flat tax cannot work without a true budget. Especially in a country that has moved so far left that pandering to personal irresponsibility and materialism is how elections are won.

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Posted by: Roja Priya at February 9, 2019 8:57 AM
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I listened to Elizabeth Warren today declaring she is running for the Democrat nomination for president.

I will only address one comment she made. She, along with many others, claim that since American is the richest nation in the world, spending on more and bigger government programs doesn’t matter.

This is the drumbeat of nearly every Dem politician I hear. Spend more and don’t worry about the funding.

Would we expect to find that the richest nation in the world owes over $21,970,283,430,567 (according to the debt clock at this moment).

Using the debt clock, we find that the richest nation in the world also has $122,493,073,345,576 in US Unfunded Liabilities.

How many countries, not so rich, have citizens who each owe $59,333 as their share of the debt?

Does j2t2, phx8, and other Liberal/Progressive/Socialists on WB feel RICH? Do they feel federal taxing fingers in their pockets? If not, why not.

Where in the world do we find $122 Trillion? How much can we add? Is there any limit on debt?

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I think that much debt is going to end very badly (sometime before 2040, or sooner). AOC’s Green Dream , or Kamala Harris’s and Bernie Sanders’ Medicare for all, free college, open-borders, and other free stuff, could bring cause an economic melt-down sooner (because you would aee all money and corporations move out of the U.S. ASAP). Notice what happened to the stock market the very next business-day after the last election on 6-Nov-2018 ?

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