Tax plan in need of a reality check

Pradyot Sharma

Opinion Editor

The Democratic Party may have endeared themselves to millennials with their compassionate approach to policy making but their policy decisions seem to suggest that as they move farther to the left, they are proportionately distancing themselves from reality. 

Freshman Representative Alexandria Ocasio-Cortez has become the darling of the left for her policies on healthcare, education, Medicare and taxation. While I’m sure she means well, her policy prescriptions for these issues seem to ignore basic principles of economics altogether. 

In her tax plan, for instance, Ocasio-Cortez proposes setting a 70 percent marginal tax rate for top earners in the country. She presents that the nation has seen higher rates of taxation before and those worked just fine. 

These proposals further stem from the belief that the rich “owe” the society and it is unfair that they are not paying ludicrously high amounts in taxes. After all, what would it matter to a Jeff Bezos if the government takes 70 percent of the billions of dollars he makes in a given year? After all, he is still left with billions of dollars.

There are many errors in this proposal starting with the delusion about how people behave at the margin. 

Supposing this plan is implemented and there is a 70 percent marginal tax rate that kicks off at say, the $ 500,000 mark. People face a trade-off between work and leisure. Work wins when they are better off doing so, i.e., when they get to take most of their income home. But with a higher marginal tax rate, people lose their incentive to earn more as the marginal value of their income beyond the $500,000 point is drastically lower than their income before that point. 

Why then would the American people be willing to work beyond that point when they clearly will not reap the benefit of their effort? 

Furthermore, a statutory tax rate does not equate an effective tax rate, i.e., just because the income tax is set at 70 percent does not mean the high earners will pay as much. 

Consider the time when the United States had a 92 percent statutory tax rate. The Tax Foundation, using an estimate to calculate the income share of the top one percent earners in the 1950s, found that they paid a maximum effective tax rate of around 42 percent and not the 92 percent that was statutory at that time. 

The high earners were able to use legal loopholes and exemptions in order to reduce the adjusted gross income they paid taxes on. Such provisions, which were disbanded during the Reagan administration, largely contributed to the success of such a high statutory rate. 

Ultimately, the evidence backing a high tax rate folds with just a little probing and proponents of such policies are left with just emotional pleas unless you are willing to ignore history, reality, and technicalities completely. 

Empathy is necessary for those who do not have enough but acting solely on that will not solve their problems, it worsens it. Real data must drive sound policy prescription if we want the nation to have a strong economy and improve the lives of its citizens. An unrealistic tax burden is not the solution.  

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