Alexandria Ocasio-Cortez — known to her fans as AOC and her constituents as the Democratic representative for New York’s 14th Congressional District — made a splash recently by suggesting a return to Kennedy-era tax rates.
“People are going to have to start paying their fair share in taxes,” she told Anderson Cooper during an interview for 60 Minutes:
You know, it — you look at our tax rates back in the ‘60s and when you have a progressive tax rate system. Your tax rate, you know, let’s say, from zero to $75,000 may be 10 percent or 15 percent, et cetera. But once you get to, like, the tippy-tops — on your 10-millionth dollar — sometimes you see tax rates as high as 60 or 70 percent. That doesn’t mean all $10 million are taxed at an extremely high rate, but it means that as you climb up this ladder you should be contributing more.
To be clear, Ocasio-Cortez hasn’t offered any sort of specific proposal. Rather, she has articulated a vision for progressive tax reform that seems to be gaining real traction among Democrats. In recent comments, for instance, both Sen. Elizabeth Warren, D-Mass., and Former Housing and Urban Development Secretary Julian Castro have alluded to the same historical precedent as Ocasio-Cortez.
Over the short term, vague comments about higher tax rates are unlikely to have much substantive impact. But they may be part of a larger, more transformative shift in American fiscal politics. As I argued in a recent article, “History suggests that leftward ideological shifts are only weakly correlated with increased progressivity in the tax system, at least over the short term. However, ideology does figure prominently in more gradual — and arguably more profound — fiscal transformations.” (Prior analysis: Tax Notes, Sept. 10, 2018, p. 1503.)
Prudent historians, like good reporters, don’t make predictions. But throwing caution to the wind, let me suggest that Democrats are poised to recast the debate over federal tax reform. Unmoved by familiar calls to broaden the tax base while lowering rates — the dominant formula since at least the 1950s — they are suggesting a return to an even older, more contentious model: broadening the base while raising marginal rates.
Marginal Arguments
In her 60 Minutes interview, Ocasio-Cortez was careful to explain that she was suggesting a return to marginal, not average, rates of 60 to 70 percent (indeed, average rates on individual income have never reached such heights). Rarely do politicians in either party try to make that sort of distinction, and many Republican responses to Ocasio-Cortez ignored it entirely. House Minority Whip Steve Scalise of Louisiana, for instance, offered this observation on Twitter: “Republicans: Let Americans keep more of their own hard-earned money. Democrats: Take away 70% of your income and give it to leftist fantasy programs.”
Grover Norquist, president of Americans for Tax Reform, offered something similar, if even more inflammatory, also via tweet: “Slavery is when your owner takes 100% of your production. Democrat congresswoman Ocasio-Cortez wants 70% (according to CNN) What is the word for 70% expropriation?”
Ocasio-Cortez offered her rate comments in response to questions about how she would pay for new spending priorities, including the much-discussed, rarely defined Green New Deal. The best shorthand description I’ve seen for this initiative comes from Vox.com: “A massive program of investments in clean-energy jobs and infrastructure, meant to transform not just the energy sector, but the entire economy. It is meant both to decarbonize the economy and to make it fairer and more just.”
Sounds expensive, and to her credit, Ocasio-Cortez didn’t shrink from the cost question. And while it’s hard to estimate the revenue effect of a vaguely defined increase in tax rates, such as the one Ocasio-Cortez suggested, The Washington Post gave it a shot and came up with a figure of $720 billion a decade. That’s not nearly enough to pay for some marquee items on the Democratic policy agenda (like Medicare for all), but it’s not nothing, either.
Conservative skeptics have pegged the yield of the Ocasio-Cortez tax much lower. Brian Riedl of the Manhattan Institute has suggested via Twitter an annual revenue boost of no more than $22 billion. Most of the difference can be explained, according to both Riedl and Jeff Stein of the Post, by the latter’s assumption that the new 70 percent rate would apply to capital gains as well as regular income. (For more conservative warnings about the dangers of high marginal rates, see Aparna Mathur, Sita Slavov, and Michael R. Strain, “Should the Top Marginal Income Tax Rate Be 73 Percent?” Tax Notes, Nov. 19, 2012, p. 905.)
Indirect Revenue Effects
Echoing Ocasio-Cortez, other Democrats have been quick to defend higher marginal tax rates by pointing to historical precedent. Dwight D. Eisenhower has been getting special attention for his willingness to tolerate rates exceeding 90 percent, even during the two-year stretch when Republicans controlled not simply the White House but both houses of Congress (1953-1955). (For more discussion about the strange persistence of high rates under a unified GOP government, see my 2012 article for the Tax Law Review: “Soak-the-Rich Republicans: The Persistence of High Tax Rates in the 1950’s.”)
Eisenhower’s tacit embrace of high tax rates can be explained by his overriding commitment to balanced budgets and debt reduction. Which is fine, as far as it goes, when trying to make the case for raising today’s marginal rates.
But the more persuasive case for higher rates, at least if you’re a progressive Democrat, depends not on the revenue they would raise directly, but on the political cover they offer for broader, middle-income tax increases. The need for such taxes on the non-rich is clear, assuming that Democrats are serious about their reform agenda. Even Sen. Bernie Sanders, I-Vt., has acknowledged their necessity in laying out his plans for social and economic reform.
If Democrats are looking for presidential inspiration, they shouldn’t be invoking Eisenhower (a reluctant taxer) but Franklin D. Roosevelt (an enthusiastic fan of soaking the rich). The high rates Eisenhower tolerated were the creation of FDR and his Democratic colleagues during the 1930s and 1940s. Roosevelt used those rates, which initially applied almost exclusively to the rich, as a way to balance the existence — and growth — of less progressive taxes on the poor and middle class. In the 1930s, New Dealers used higher marginal income tax rates to help justify regressive consumption taxes on alcohol and tobacco, which supplied anywhere from a third to half of federal revenue during the early 1930s.
Later, during the 1940s, FDR relied on high upper-bracket tax rates to help grease the skids for a dramatic downward expansion of the income tax. The storied transformation of the income tax from a “class tax” to a “mass tax” was made possible, politically, by a tacit promise: Americans of middling means would pay more (initially for the war and later for a permanently expanded federal state), but in exchange, rich Americans would be expected to pay at even higher rates (both marginal and average).
This bargain proved both successful and durable. It survived the burst of patriotism and self-sacrifice that marked the wartime years, forming the basis for a new tax regime that remains largely intact even today.
The implications for contemporary progressive reform are obvious. If Democrats hope to make good on their promises of a Green New Deal, Medicare for all, or any of a host of other priorities, they must look for new revenue. Some of that revenue can be raised by taxing the rich. But the big-ticket items, especially healthcare reform, will take a lot more.
To some extent, new taxes can be justified (politically) by new benefits. Historically, Americans have been tolerant of earmarked taxes used to fund social programs. Such taxes have the added bonus of protecting the programs they fund because people tend to view the programs as bought and paid for, even when the taxes don’t actually cover the full cost of the program.
But if Democrats are listening to history, they won’t rely simply on a fee-for-service model of funding entitlements. They will present Americans with the same sort of bargain FDR offered, acknowledging the need for higher taxes on the non-rich but promising that wealthy Americans will be asked to pay their “fair share,” too – however that might be defined.
Problems With the Bargain
As Democrats look back fondly on the tax rates of the past, they might take a minute to consider some of the problems created by them. Beginning in the latter half of the 1930s, even liberal economists and tax lawyers began to warn about the disincentive effects of high rates, as well as their tendency to encourage more aggressive forms of tax avoidance.
“The federal personal income tax rates are very low at the bottom and very high at the top,” observed two New Deal economists in 1937. “They are probably higher at the top than they should be, in view of the incentives to avoidance and evasion that they create, and the consequent administrative troubles, and in view, also, of the danger of stifling the willingness to take risks.”
Some of those concerns — especially about avoidance — were borne out in the decades following World War II. “Most of those who still favor very high income tax rates as a matter of social philosophy have recognized that on balance they are bad,” wrote Dan Throop Smith, a Harvard economist and Treasury tax expert during the Eisenhower administration. “They distort personal and business decisions and lead to action and attitudes which may jeopardize the income tax itself.”
Smith believed that high rates encouraged tax avoidance. “With high taxes, it becomes much more important to save a dollar of taxes than to earn another dollar of income,” he wrote in 1960. Even worse, the resulting avoidance tended to erode public faith in the tax system. “We still have among most social groups in this country a feeling that tax fraud is morally reprehensible,” he wrote. “This is a tradition as precious as it is rare in the world.” (Prior analysis: Tax Notes, Sept. 24, 2012, p. 1516.)
Even some fans of progressive taxation worried that high rates were undermining the tax system. Those rates were vulnerable because wealthy, powerful taxpayers were disinclined to tolerate them in peacetime. The rates survived only because lawmakers made them less onerous by chipping away at the tax base (thereby lowering average effective tax rates on wealthy taxpayers).
As the economist Harold Groves wryly observed during testimony to Congress in 1955: “The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that make these rates specious.” The pernicious effects of this unspoken, unsavory compromise almost certainly played a role in fostering the popular tax revolt that burst upon the national scene in the 1960s and 1970s.
Avoidance Worries Persist
Concern about avoidance continues to bedevil calls for higher tax rates, even in liberal circles. “I would be very hesitant to go much over 50 percent,” tweeted Dean Baker of the Center for Economic and Policy Research. “You have to ask what you’re trying to accomplish. You are likely to raise very little revenue and give large amounts of money to tax shelter industry. Is that good?”
Still, many liberal commentators have been quick to defend Ocasio-Cortez against critics, noting recent work by economists like Peter Diamond, Emmanuel Saez, Christina Romer, and others that pegs the optimal top tax rate north of 70 percent (Paul Krugman has provided a useful summary of this literature).
Thoughtful conservative critics, however, have mustered many of the usual arguments against high rates. John H. Cochrane, a senior fellow at the Hoover Institution, dismisses worries about the way high rates might diminish work incentives (“once people have found jobs and careers, they tend to work about 40 hours a week or so even at pretty high tax rates,” he writes). He focuses instead on human capital decisions: “How much will I earn, after all taxes — what lifestyle will I lead — if I go to med school, or just stay where I am?” Cochrane is also concerned about the avoidance problem. “A 70% or 80% marginal federal income tax would be first and foremost a boon for tax lawyers and accountants,” he says.
Protecting the Tax Base
In response to avoidance worries, some fans of the Ocasio-Cortez agenda have emphasized the importance of base broadening. For instance, New York University law professor David Kamin has acknowledged that legal tax minimization might be a real threat to the fisc in a high-rate environment. But he rejects the idea that tax avoidance makes rate increases untenable. “Progressive tax reform should be comprehensive,” he wrote on Twitter. Among other things, Kamin suggested (1) curbing the ability of individuals to use corporations as a shelter from individual tax rates, (2) repealing the recently enacted deduction for some passthrough businesses, (3) providing for the taxation of capital gains at death, (4) increasing capital gains rates generally, and (5) boosting IRS enforcement across the board.
Protecting the tax base is hardly a new idea for progressives. Roosevelt combined his relentless rate hikes with periodic campaigns against legal tax avoidance (which he conflated with illegal tax evasion because he recognized no moral difference between the two). But Kamin’s reminder of the importance of attending to the tax base is timely, because many of today’s most eager rate raisers seem to lose sight of this crucial issue in their rush to create new super-brackets.
The real question, of course, is whether any of this progressive tax talk really matters. With both the Senate and the White House in Republican hands, the short-term prospects are grim.
But the emerging progressive agenda still matters, if only because it poses a fundamental challenge to definitions of tax reform that have dominated fiscal politics for the last half-century. For traditional reformers, high rates have always been the problem, while base broadening has been the revenue-neutralizing solution.
For the new generation of progressive reformers, tax-based redistribution is the goal, with higher rates and vigorous base broadening the means. And while recent discussion has focused primarily on individual taxes, the progressive impulse extends to corporate taxes. According to Roll Call, the new Democratic chair of the House Budget Committee has signaled that his coming budget plan will feature a higher corporate tax rate, perhaps reaching 28 percent.
Only time will tell if all this talk will produce meaningful results. But the terms of debate seem to be changing — and what constitutes “tax reform” may look different in the years ahead.