Opinion | The Economics of Soaking the Rich

I do not know how nicely Alexandria Ocasio-Cortez will carry out as a member of Congress. But her election is already serving a worthwhile objective. You see, the mere considered having a younger, articulate, telegenic nonwhite lady serve is driving many on the suitable mad — and of their insanity they’re inadvertently revealing their true selves.

Some of the revelations are cultural: The hysteria over a video of AOC dancing in faculty says volumes, not about her, however concerning the hysterics. But in some methods the extra vital revelations are mental: The proper’s denunciation of AOC’s “insane” coverage concepts serves as an excellent reminder of who is definitely insane.

The controversy of the second includes AOC’s advocacy of a tax charge of 70-80 % on very excessive incomes, which is clearly loopy, proper? I imply, who thinks that is smart? Only ignorant individuals like … um, Peter Diamond, Nobel laureate in economics and arguably the world’s main skilled on public finance (though Republicans blocked him from an appointment to the Federal Reserve Board with claims that he was unqualified. Really.) And it’s a coverage no one has each applied, apart from … the United States, for 35 years after World War II — together with essentially the most profitable interval of financial development in our historical past.

To be extra particular, Diamond, in work with Emmanuel Saez — one in all our main consultants on inequality — estimated the optimum high tax charge to be 73 %. Some put it larger: Christina Romer, high macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates it at greater than 80 %.

Where do these numbers come from? Underlying the Diamond-Saez evaluation are two propositions: Diminishing marginal utility and aggressive markets.

Diminishing marginal utility is the commonsense notion that an additional greenback is price rather a lot much less in satisfaction to individuals with very excessive incomes than to these with low incomes. Give a household with an annual earnings of $20,000 an additional $1,000 and it’ll make a giant distinction to their lives. Give a man who makes $1 million an additional thousand and he’ll barely discover it.

What this suggests for financial coverage is that we shouldn’t care what a coverage does to the incomes of the very wealthy. A coverage that makes the wealthy a bit poorer will have an effect on solely a handful of individuals, and can barely have an effect on their life satisfaction, since they are going to nonetheless have the ability to purchase no matter they need.

So why not tax them at 100 %? The reply is that this is able to get rid of any incentive to do no matter it’s they do to earn that a lot cash, which might harm the economic system. In different phrases, tax coverage towards the wealthy ought to don’t have anything to do with the pursuits of the wealthy, per se, however ought to solely be involved with how incentive results change the habits of the wealthy, and the way this impacts the remainder of the inhabitants.

But right here’s the place aggressive markets are available. In a wonderfully aggressive economic system, with no monopoly energy or different distortions — which is the sort of economic system conservatives need us to consider we have now — everybody will get paid his or her marginal product. That is, for those who receives a commission $1000 an hour, it’s as a result of every additional hour you’re employed provides $1000 price to the economic system’s output.

In that case, nonetheless, why can we care how arduous the wealthy work? If a wealthy man works an additional hour, including $1000 to the economic system, however will get paid $1000 for his efforts, the mixed earnings of everybody else doesn’t change, does it? Ah, nevertheless it does — as a result of he pays taxes on that additional $1000. So the social profit from getting high-income people to work a bit more durable is the tax income generated by that additional effort — and conversely the price of their working much less is the discount within the taxes they pay.

Or to place it a bit extra succinctly, when taxing the wealthy, all we must always care about is how a lot income we elevate. The optimum tax charge on individuals with very excessive incomes is the speed that raises the utmost potential income.

And that’s one thing we are able to estimate, given proof on how responsive the pre-tax earnings of the rich truly is to tax charges. As I mentioned, Diamond and Saez put the optimum charge at 73 %, Romer at over 80 % — which is in keeping with what AOC mentioned.

An apart: What if we keep in mind the fact that markets aren’t completely aggressive, that there’s quite a lot of monopoly energy on the market? The reply is that this nearly absolutely makes the case for even larger tax charges, since high-income individuals presumably get quite a lot of these monopoly rents.

So AOC, removed from exhibiting her craziness, is absolutely in step with critical financial analysis. (I hear that she’s been speaking to some superb economists.) Her critics, however, do certainly have loopy coverage concepts — and tax coverage is on the coronary heart of the loopy.

You see, Republicans nearly universally advocate low taxes on the rich, based mostly on the declare that tax cuts on the high may have big useful results on the economic system. This declare rests on analysis by … nicely, no one. There isn’t any physique of great work supporting G.O.P. tax concepts, as a result of the proof is overwhelmingly towards these concepts.

Look on the historical past of high marginal earnings tax charges (left) versus development in actual GDP per capita (proper, measured over 10 years, to clean out short-run fluctuations.):

Top tax charges and growthCreditTax Policy Center, BEA

What we see is that America used to have very excessive tax charges on the wealthy — larger even than these AOC is proposing — and did simply tremendous. Since then tax charges have come means down, and if something the economic system has performed much less nicely.

Why do Republicans adhere to a tax concept that has no help from nonpartisan economists and is refuted by all obtainable knowledge? Well, ask who advantages from low taxes on the wealthy, and it’s apparent.

And as a result of the social gathering’s coffers demand adherence to nonsense economics, the social gathering prefers “economists” who’re apparent frauds and might’t even pretend their numbers successfully.

Which brings me again to AOC, and the fixed effort to painting her as flaky and ignorant. Well, on the tax difficulty she’s simply saying what good economists say; and she or he positively is aware of extra economics than nearly everybody within the G.O.P. caucus, not least as a result of she doesn’t “know” issues that aren’t true.

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