Editor’s Note: Edward J. McCaffery is Robert C. Packard trustee chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of “Fair Not Flat: How to Make the Tax System Better and Simpler” and founder of the People’s Tax Page. The opinions expressed in this commentary are his own. View more opinion at CNN.
In a bit of good news for those who want more (or at least some) substance in their politics, Rep. Alexandria Ocasio-Cortez, D-New York, is attracting attention for her proposal to raise income tax rates on upper-income earners, all the way up to 70%. Granted, Ms. Ocasio-Cortez is not getting as much attention for her tax policy as for her dancing, but at least the coverage of her tax ideas is a start toward talking about things that really matter.
And it is a good start. Ocasio-Cortez is pointing a spotlight on the pressing issue of economic inequality in America, and on the role of current American tax policy in fomenting it. To keep things short, the rich in America are really rich, and are getting richer, and our tax laws are helping them do it. That is not good for the health of our democracy. Ocasio-Cortez is right to demand change.
But the congresswoman’s particular idea for change nonetheless falls short.
There are two broad dimensions to any tax system – what is being taxed, and at what rate. Ocasio-Cortez’s proposal, like many Democratic plans, focuses only on the rate part.
And while it is true that America has had a 70% top income tax rate – which it got when our first great tax-cutting President, John F. Kennedy, cut the top rate from 90% – things did not work out so well for liberals under it. High earners used loopholes to avoid the rate.
Worse, high tax rates fueled a political revolution that led to Ronald Reagan’s presidency. Reagan slashed the marginal rate on top earners all the way down to 28%, and it has stayed under (even if just under) 40% ever since. Reagan is still a hero to many for his anti-tax stance, and Democrats have been playing defense on tax policy for decades.
Does history and common sense thus dictate that progressivity in tax is dead? No. It just requires a bit more analysis.
The central problem today with the income tax is not its rate structure, but with what it covers – and what it doesn’t cover. In particular, the income tax rates do not apply to “unrealized appreciation,” which is what happens when the rich get richer without so much as touching actual cash. To illustrate, the radical corporate income tax cuts in President Trump’s signature tax bill, the Tax Cuts and Jobs Act, led to a rise in stock prices that benefitted stock owners, tax-free. Warren Buffett’s Berkshire Hathaway, for one ready example, got a one-time $29 billion windfall from Trump’s tax cuts. As the principal owner, Buffett himself benefited to the tune of billions. But Buffett paid no tax on his very good day.
The fundamental flaw in the US tax system is that we tax wages, not wealth. If America were to follow Rep. Ocasio-Cortez’s lead, high income workers would be facing higher taxes, up to 70% for those with more than $10 million of taxable income. Many upper-income earners would be tempted to move, or retire, or shift their financial plans to show fewer wages and all of them, as workers, are shouldering a hefty tax burden as is. Meantime, the truly rich, who do not have to work, or work in the ways ordinary folk do, would continue to pay nothing on their accumulated wealth. That’s crazy.
Democrats should be looking to change what is being taxed, to move to a system, such as a progressive spending tax, that would make the truly rich, who now pay nothing, pay something.
Not convinced, ye liberals of little faith? Consider this. While we can and should admire Ocasio-Cortez’s energy, passion, courage, intellect and ambition, her proposal to raise the top income tax rate to 70% would do nothing to those many American billionaires who pay little or no tax on their wealth. Two you may have heard of? How about Jared Kushner and President Donald J. Trump.
Find a way to tax the likes of them, and lots of us can start dancing.