The controversy of the moment involves AOC’s advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? I mean, who thinks that makes sense? Only ignorant people like … um, Peter Diamond, Nobel laureate in economics and arguably the world’s leading expert on public finance. … And it’s a policy nobody has ever implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.
As I said, Diamond and Saez put the optimal rate at 73 percent, Romer at over 80 percent — which is consistent with what AOC said.
What we see [from a displayed chart] is that America used to have very high tax rates on the rich — higher even than those AOC is proposing — and did just fine. Since then tax rates have come way down, and if anything the economy has done less well.
Which brings me back to AOC, and the constant effort to portray her as flaky and ignorant. Well, on the tax issue she’s just saying what good economists say
Back in the glory days to which Krugman refers, Americans escaped the high ordinary income tax rates by converting what looked like ordinary income into capital gains, taxed at roughly the same rate then as now. See https://philip.greenspun.com/blog/2016/05/06/eisenhower-era-tax-avoidance-strategies-from-eisenhower/
Let’s assume that the Democrats will regain control over the U.S. at some point and that there is a good chance that the young and charismatic folks such as AOC will be the leaders. We will then have the tax rates that they’re currently proposing.
What would be the impact on a successful Californian, for example? The current tax rate is 39.6 percent federal plus 13.3 percent state. So the earner can spend 47 cents of each gross dollar. With an 80 percent federal rate, the after-tax benefit of earning one extra dollar would be 7 cents. This is an 85-percent pay cut for the rich Californian, which should provide some motivation to act.
Question for today: How will Americans adapt?
The world is very different from what it was in the high-tax heyday. The economy is a lot more global. It is possible to pay 10 percent on income in the UK (see https://philip.greenspun.com/blog/2019/01/02/move-to-the-uk-if-youre-an-entrepreneur-10-percent-capital-gains-tax/ ) or 20ish percent in Estonia or Singapore. Americans can take advantage of foreign corporate tax rates by starting enterprises overseas, but individual income tax rates are available, however, only to those who renounce U.S. citizenship, which can be expensive and challenging. (Also, for anyone living in the UK, it is quite easy for a family court plaintiff to impose a 50 percent tax on assets after a two-year marriage! See Real World Divorce.)
We have corporate tax rates of about 26 percent now (Tax Foundation). Could it be that our most productive citizens will simply start corporations and accumulate profits inside the corporate shell indefinitely, Warren Buffett style, thus deferring taxes for decades?
Will every rich family set up non-profit orgs like the Clinton Foundation and run all of their Gulfstream charter and parties in Switzerland and Australia through the foundation?
Given our spectacular debt-to-GDP ratio, the fondness of the American voter for a command-and-control centrally planned economy, and the growing number of voters who aren’t subject to income tax (since they are on welfare or otherwise have low income), high future individual tax rates do seem plausible.
Or will productive Americans just decide to pay the exit tax and renounce their citizenship, following Eduardo Saverin‘s example?