Is AOC’s 70% Tax Rate Popular?

Earlier this year, Alexandria Ocasio-Cortez (“AOC”), the Democratic Congresswoman from New York, floated the idea of a top marginal tax rate of 70% to fund the “Green New Deal”. The 70% rate is applicable on incomes over USD 10mil.

Historically, the U.S. used to have extremely high marginal tax rates. Under Eisenhower, the top earners paid 91% marginal rate. Under Kennedy and Johnson, it fell to 70% and with Reagan it was 50%. It then fell to 38% in 1986 with tax reform. In the U.S., an individual earning USD 550,000 a year pays the same marginal rate as a person earning 10 or 50 times as much.

MIT’s Peter Diamond and Berkeley’s Emmanuel Saez relaunched this debate in 2012, with the case for a 73% top income tax rate in the U.S. This according to them would maximize revenue. Many others have also argued for an even higher rate on different grounds. Close to 40 years, Reaganomics held sway with “free” market, smaller governments, and free trade. It was well supported by Milton Friedman.

While Republicans often justify lower taxes by arguing “job creators” need to be incentivised. The trickle-down effect to workers and consumers has not held. For the rich to build businesses, it requires governments to provide the framework and institutions. Elizabeth Warren, another Democratic candidate for President, says “there is nobody in this country (U.S.) who got rich on his own -- nobody”. Governments created the laws, institutions, roads, education and property rights before businesses could turn in their profits.

Progressive taxes should come in the form of an attack on inequalities on wealth and income. Wealth tax is something even Bill Gates agrees. Presidential hopeful Elizabeth Warren has suggested a 2% levy on assets above USD 50mil and 3% on assets above USD 1bil. Implementing “steep” wealth and income taxes gives any democracy a shot in the arm. Capitalism creates wealth and income inequality. Coupled with “supply-side” tax cuts for the rich, a vicious cycle is set for further regressive policy preferences.

What about Malaysia?

The new Budget 2020 has moved the top marginal tax rate for individuals to 30%, for incomes above RM2 million. This is still far short of the U.S. idea of 70%. Perhaps, some tax experts and economists need to review revenue maximisation and arrive at a rate that is beneficial to fund the ‘Renewables and Digital’ Age for Malaysia.

Reference:

1. Matthew Yglesias, Alexandria Ocasio-Cortez is floating a 70 percent top tax rate, www.vox.com

2. Josh Mound, AOC’s 70% Tax Plan Is Just the Beginning, https://jacobinmag.com

3. Lauren Feiner, Bill Gates: Taxing the rich is fine, but ‘extreme’ politicians like Alexandria Ocasio-Cortez are missing the point by focusing on income, www.cnbc.com