In a recent 60 Minutes interview, freshmen congresswoman Alexandria Ocasio-Cortez floated an idea that has produced much confusion and outrage. As part of a way to finance something called a “Green New Deal,” Ocasio-Cortez proposed a top marginal income tax rate as high as 70 percent.
Unsurprisingly, conservative critics lashed out and took to social media to chastise Ocasio-Cortez. Congressmen like Rep. Steve Scalise suggested the plan would “take away 70 percent of your income and give it to leftist fantasy programs.” Soon after, Grover Norquist, head of the Americans for Tax Reform, likened the policy to “slavery.” Fox and Friends and other outlets spent days patronizing Ocasio-Cortez and lambasting her proposal.
If it were true that Ocasio-Cortez were trying to tax 70 percent of your hard-earned money, I’d be jumping in with Scalise and Norquist. The problem is that critics seem to be either purposely misrepresenting or misunderstanding the plan. Where is the misunderstanding? To begin, critics of the idea are missing a few key things.
For starters, they’re getting the details of the plan itself wrong. The key word to understand in this proposal is “marginal,” which contrasts with many taxes that work as a flat rate against your earned income. This explains why Ocasio-Cortez’s proposal sparked so much backlash because people are assuming she’s suggesting the government tax 70 percent of everyone’s income.
But she’s not. Marginal tax rates apply a tax towards different brackets of your income. Tax brackets are the different levels of income a person can make. There a total of six brackets that are taxed at 10, 15, 25, 28, 33 and 35 percent of income ranging from $0 to over $300,000. When you pay taxes on these rates, you’re paying them on each level of income that is attributed to the tax bracket.
Let’s put that in clearer terms. If you make $250,000, you would be paying 10 percent on the first $8,350 of your money; 15 percent on the next $8,350 to $33,950 on your income, so on, so forth.
Vox notes that it’s easiest to think of marginal tax rates as filling different pockets, each pocket being an income bracket. Every pocket you fill, you’re paying a rate on that individual pocket. Once you reach a higher bracket, you fill it up and pay the rate on a new pocket. By the time you’re done, you add up the full amount of taxes paid on each pocket and get the total amount of taxes paid on your entire income. It is not, as it is commonly understood, counting all your money and paying one single rate.
That means two important things. The first is that since nobody pays one rate on their earnings through marginal tax rates, the proposal is far more equitable than the current tax code is. It’s much fairer to assign progressive rates on different income levels, given that the same tax rate for does not impact everyone evenly. Taking 15 percent of a millionaire’s income would have a marginal effect compared to taking 15 percent of a working college students’.
But the more important takeaway is that if you don’t make $10 million, you don’t fall in the 70 percent bracket at all and thus won’t be taxed the new rate.
To repeat: if you don’t make enough to fall within the highest bracket Ocasio-Cortez wants to add, nothing changes for you.
Also worth noting is that it’s historically odd that there are only six brackets to tax. Under the current tax code, someone who makes half a million a year is paying the same exact marginal rate as someone who makes 10 times as much.
Additionally, not only did we have more brackets, but the top bracket under Eisenhower paid a 91 percent rate, which fell to 70 under Kennedy. Ocasio-Cortez is suggesting we bring it back.
To recap, the details of the policy are reasonable, and there’s historical precedent for it. What does the research say?
Recently, economists have proposed policies similar to Ocasio-Cortez’s (she likely borrowed the idea from academics, given her background is in economics). MIT’s Peter Diamond and Berkeley’s Emmanuel Saez’s 2012 paper argues for a 73 percent top rate, providing analysis that suggests those making millions of dollars won’t be deterred from investing and innovating. A 2006 paper in the Journal of Political Economy suggests the same and provides historical analysis disproving fears that it would slow down the economy.
Higher marginal tax rates, be it Ocasio-Cortez’s rate of 70 or not, are fairer for everyone. Raising them is not punishment for the rich, but an even distribution of economic obligations we all hold. Designing the system to reflect fair outcomes is the least we could do.