Opinion, Berkeley Blogs

Alexandria Ocasio-Cortez’s tax hike idea is not about soaking the rich

By Gabriel Zucman

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Two UC Berkeley professors argue a new tax proposal is actually about curtailing inequality and saving democracy. (Courtesy image Sole Treadmill)

This article was written by UC Berkeley economics professors Gabriel Zucman and Emmanuel Saez. It first appeared in the New York Times.

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Alexandria Ocasio-Cortez has kick-started a much-needed debate about taxes. But the debate, so far, has been misplaced. Its obvious that the affluent whove seen their earnings boom since 1980 while their taxes fell can contribute more to the public coffers. And given the revenue needs of the country, it is necessary.

But thats not the fundamental reason higher top marginal income tax rates are desirable. Their root justification is not about collecting revenue. It is about regulating inequality and the market economy. It is also about safeguarding democracy against oligarchy.

It has always been about that. Look at the history of the United States. From 1930 to 1980, the top marginal income tax rate averaged 78 percent; it exceeded 90 percent from 1951 to 1963. Whats important to realize is that these rates applied to extraordinarily high incomes only, the equivalent of more than several million dollars today. Only the ultrarich were subjected to them. In 1960, for example, the top marginal tax rate of 91 percent started biting above a threshold that was nearly 100 times the average national income per adult, the equivalent of $6.7 million in annual income today. The merely rich the high-earning professionals, the medium-size company executives, people with incomes in the hundreds of thousands in todays dollars were taxed at marginal rates in a range of 25 percent to 50 percent, in line with whats typical nowadays (for instance, in states like California and New York, including state income taxes).

That few people faced the 90 percent top tax rates was not a bug; it was the feature that caused sky-high incomes to largely disappear. The point of high top marginal income tax rates is to constrain the immoderate, and especially unmerited, accumulation of riches. From the 1930s to the 1980s, the United States came as close as any democratic country ever did to imposing a legal maximum income. The inequality of pretax income shrunk dramatically.

The view that excessive income concentration corrodes the social contract has deep roots in America a country founded, in part, in reaction against the highly unequal, aristocratic Europe of the 18th century. Sharply progressive taxation is an American invention: The United States was the first country in the world, in 1917 four years after the creation of the income tax to impose tax rates as high as 67 percent on the highest incomes. When Representative Ocasio-Cortez proposes a 70 percent rate for incomes above $10 million, she is reconnecting with this American tradition. Shes reviving an ethos that Ronald Reagan successfully repressed, but that prevailed during most of the 20th century.

And shes doing so at a time when there is an emergency. For just as we have a climate crisis, we have an inequality crisis. Over more than a generation, the lower half of income distribution has been shut out from economic growth: Its income per adult was $16,000 in 1980 (adjusted for inflation), and it still is around $16,000 today. At the same time, the income of a tiny minority has skyrocketed. For the highest 0.1 percent of earners, incomes have grown more than 300 percent; for the top 0.01 percent, incomes have grown by as much as 450 percent. And for the tippy-top 0.001 percent the 2,300 richest Americans incomes have grown by more than 600 percent.

Just as the point of taxing carbon is not to raise revenue but to reduce carbon emissions, high tax rates for sky-high incomes do not aim at funding Medicare for All. They aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.

Of course, there are many policies from the enforcement of antitrust laws to a broader access to education; from the regulation of intellectual property to better corporate governance that can contribute to curbing inequality in the years to come. And government transfers, whether in the form of income support for families or public health insurance, have a critical role to play.

But redistribution alone will not be enough to address the inequality challenge of the 21st century. All societies that have successfully tamed inequality have done so mostly by curbing the concentration of pretax income the inequality generated by the markets for the simple reason that extreme market inequality undermines the very possibility of redistribution. Tolerating extreme inequality means accepting that its not a gross policy failure, not a serious danger to our democratic and meritocratic ideals but that its fair and just and natural. It produces its own self-justifying ideology. It vindicates the winners of world markets. But vindicated winners, sure of their own legitimacy, seldom share much of their just deserts with the rest of society.

An extreme concentration of wealth means an extreme concentration of economic and political power. Although many policies can help address it, progressive income taxation is the fairest and most potent of them all, because it restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else.

A common objection to elevated top marginal income tax rates is that they hurt economic growth. But lets look at the empirical evidence. The United States grew more strongly and much more equitably from 1946 to 1980 than it has ever since. But maybe in those years the United States, as the hegemon of the post-World War II decades, could afford bad tax policy? Lets look then at Japan in 1945, a poor and war-devastated country. The United States, which occupied Japan after the war, imposed democracy and a top marginal tax rate of 85 percent on it (almost the same rate as at home 86 percent in 1947). The goal was obviously not to generate much revenue. It was to prevent, from that tabula rasa, the formation of a new oligarchy. This policy was applied for decades: In 1982, the top rate was still 75 percent. Yet between 1950 and 1982, Japan grew at one of the fastest rates ever recorded (5.1 percent a year per adult on average), one of the most striking economic success stories of all time.

Contrast Japan in 1945 with Russia in 1991. When Communism fell, Russia was also a poor country, with income and life expectancy well below that of Western economies. In lieu of 85 percent top rates, however, Russians got fast privatization and a top tax rate of 30 percent again modeled on what was prevailing in the United States at the time (31 percent in 1991). That rate was replaced in 2001 by an even lower flat rate of 13 percent. That shock therapy created a new oligarchy, led to negative income growth for the bottom half of the population, fostered a general discontent with democracy and produced a drift toward authoritarianism.

Progressive income taxation cannot solve all our injustices. But if history is any guide, it can help stir the country in the right direction, closer to Japan and farther from Putins Russia. Democracy or plutocracy: That is, fundamentally, what top tax rates are about.