Realist, not conformist analysis of the latest financial, business and political news

70% Marginal Tax Rates Don’t Mean The Rich Pay More Tax

Varied – Alexandria Ocasio Cortez, Elizabeth Warren, Bernie Sanders, you know, the brain dead end of the Democrats – seem to think that if you just whack up the rate of tax on the top taxpayers then you’ll get lots more tax revenue. This isn’t in fact so. As we’ve pointed out before those 70 and 90% marginal top tax rates of the 1950s didn’t mean the Federal Government collected more of GDP in revenue. And the percentage of GDP collected by the income tax was actually lower:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]We can also look at the percentage of GDP raised by the income tax. Those high personal income tax rates topped out at raising 7.8 percent of GDP. We get 8.4 percent, perhaps 8.3 percent, of GDP from today’s lower marginal rates. This isn’t telling us that higher rates give the politicians more money to play with.[/perfectpullquote]

That’s not a marker of high top tax rates being great revenue raisers now, is it?

But we can go further than this and look at the relative contributions of the “rich” and others to the tax take. Which is just what this chart does:

High top taxes don’t mean more money from high top tax payers

The thing about this is that we’re not whimpering about in the realms of theory, we’re not trying to prove, nor disprove, Art Laffer – by the way, he’s right when he says there’s a maximum revenue raising tax rate, wrong when he says that all tax cuts pay for themselves through increased revenue – we’re just doing a simple correlation by observing reality:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Now that Rep. Ocasio-Cortez wants to raise the top personal income tax rate to 70% and Rep. Ilhan Omar thinks 90% would be even better, it might be a good time to review the history over time from 1960 to 2013 of: a) the top marginal tax rate in every year and b) the share of total income taxes collected from the top one-half percent of taxpayers. As the chart above shows, the share of taxes collected from “the rich” increased over time from about 14-15% in the 1970s to almost double that amount by the late 1990s and was as high as 29% in 2005, during a period when the top marginal income tax declined from 91% in the early 1906s to 70% in the 1970s, and then to 50% and 28% under Reagan’s tax reforms, before increasing to between 35-40% from 1993 to 2013.[/perfectpullquote] [perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]In other words, there is an historical inverse relationship between the top marginal income tax rates and the tax burden on “the rich.” Lower top marginal tax rates are associated with a greater share of taxes paid by the top one-half of one percent of earners. Therefore, if the goal is to “soak the rich” and “make the rich pay their fair share,” you can accomplish that a lot more effectively by lowering, not raising, the top marginal tax rate. Conversely, if AOC and Omar are successful in raising the top marginal rate back up to 70-90%, it would likely result in lowering the tax burden on the rich and raising the tax burden on the non-rich.[/perfectpullquote]

Now, again, it’s entirely possible to whine off into theory about why higher rates will lead to more revenue, revenue supplied only by the rich. But that theory does have this little fight with reality to contend with….

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Matt Ryan
Matt Ryan
5 years ago

Ocasio Cortez at least has the excuse of the millennials which is they rediscover the same stupid ideas that previous generations have discovered and discarded. Wisdom (perhaps interchangeable with experience) is knowing these mistakes and not repeating them – hence why the young do not have wisdom.

Her problem of course is that she is too stupid and/or conceited to be told she’s wrong.

Jonathan Harston
Jonathan Harston
5 years ago

Is any of it related to the allowance level? If at the time of the 70% rate everybody over £1 paid taxes the 70%-ers would be a smaller proportion of taxpayers than if at the time of the 50% rate people only paid taxes over £25,000.

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