Tax Rates and Building a Good Society

From FiveThirtyEight, on Alexandria Ocasio-Cortez’s suggestion of a marginal 70% tax rate:

…the idea is that once a person had made at least $10 million in a single year, every dollar coming in after that would be taxed at a rate of up to 70 percent. Many have dismissed the idea, saying it would be too radical and would damage the economy. But the Democratic representative from New York might have hit on something voters want.

It’s perhaps not surprising that Americans would support higher taxes on top earners given that tax rates on high income brackets were once much higher than they are today. The top marginal tax rate was as high as 94 percent in the 1940s, and throughout the 1970s, Americans in the top income bracket (which in 1970 was $200,000 and above, or about $1.3 million in today’s money) were taxed at a 70 percent rate, according to the Tax Policy Center.

The National Review, among other conservative outlets, dismiss the idea outright, saying that it would damage the economy, not raise enough money for the socialization of some sectors (health, education, etc.), and that those in the highest tax brackets would just find loopholes to not pay the required rate. The argument also goes that the wealthiest Americans don’t gain most of their wealth from earned wages, but from capital gains. Jeff Bezos is a prime example — his annual Amazon salary is a measly $81k per year, while the rest of his earnings come directly from investments.

I’m no economist, and I’m also not a policy wonk. I have, however, a few thoughts about this:

First, if the concern is simply that raising the tax rate on earned wages will not do much because most wealth is generated by capital gains (investments, etc.), then why wouldn’t we also apply the tax rate to capital gains themselves? I’m not necessarily saying all capital gains, just capital gains plus earnings over $10 million per year. Surely it can’t be that difficult (again, maybe I’m being naive here) to close loopholes like this so that Americans are simply required to pay high tax rates on exorbitant capital gains.

This brings me to my second point, which is a little more philosophical. These questions of tax rates always bump up against questions of liberty, governmental control over wealth, and socialization. The concern, I think, is two-fold: first, that high tax rates on larger incomes dis-incentivizes economic growth. In other words, if we tax too highly after a certain income, we prevent people from pushing for bigger incomes, which causes people to work less, produce less, etc. Second, the other concern is whether we, as a society, can trust our elected leaders to handle wealth well. How do we know that the government won’t use such an enormous amount of wealth for its own corrupt ends? This may be a fair point. I don’t really know.

Let’s come back to the philosophical question though, especially as it relates to liberty and growth. My question is this — what does it take to make a truly “good” society? What does it mean to seek “the good” as a country? Those are collective questions which we must answer, but which are directly related to the individual question about what exorbitant wealth does to us. I think it’s fair to say that $10 million dollars, gained annually is an “exorbitant” amount of wealth for a single individual. At what point is there simply “enough”? I daresay, most Americans would likely be happy, whole, and healthy at an annual income of far lower than that (ignoring, for the moment, that wealth doesn’t itself generate happiness). Is it unfair, then, to have such a high tax rate on income over $10 million? Essentially, we’d be saying as a society to people that gain that amount of wealth: “Thank you for the work that you have done. You are free to continue to live in extreme comfort, with all the pleasures you could ever want. Much of the extra wealth you’re producing is going to do a lot of good for your community, and for the people around you that are incapable of producing what you have produced.”

So, two concerns in a nutshell:

  • Tax both wages and capital gains over $10 million at the marginal rate of 70% (side note: rather than worrying whether this will stop economic growth, isn’t it possible that those earning above that tax bracket funnel more profit down to wage earners, thus still re-distributing wealth, albeit via the market rather than the government?).
  • Set a limit on what is an “exorbitant” amount of wealth for individuals. $10 million annually doesn’t seem unreasonable to me. This doesn’t dis-incentivize those who desire wealth, but also helps to economically create a society that cares for those who are less capable of supporting themselves and producing on their own.

This isn’t socialism, per se. Rather, it stems from a desire to build a good, just society, and to use American wealth in a way that helps all of us flourish.

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