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The irrelevant debate over the top rate of tax

Credit: Alex Wong / Getty

February 6, 2019   3 mins

Tax (specifically, how much the rich ought to pay) is a touchy subject at the World Economic Forum – a.k.a. Davos.

But this year it kept on popping up in conversation. For instance, here is the Dutch historian and Davos panelist Rutger Bregman, delivering a few home truths. It was Bregman’s first visit to the conference, it’ll be interesting to see if it’s also his last.

There was an interesting exchange at another Davos event – this time featuring Michael Dell, the founder and CEO of Dell Technologies. Reporting for the Washington Post, Hamza Shaban writes that Dell was asked about the Alexandria Ocasio-Cortez plan to tax incomes exceeding $10 million at a rate of 70%:

“[He] first responded by saying he’s more comfortable allocating significant resources through his private foundation than handing over that money to the government. But then he answered more directly.

“‘No, I am not supportive of that, and I don’t think it would help the growth of the U.S. economy,’ he said in response to questions from The Washington Post.

“When Dell was asked to explain why he thinks that, he said, ‘Name a country where that’s worked — ever.'”

Happily, an expert was on hand:

“Co-panelist and MIT professor Erik Brynjolfsson jumped in to offer an answer: ‘the United States.'”

In America’s post-war golden age (a time of rapid economic growth), the top rate of income tax was considerably higher than 70%, around the 90% mark in fact.

But did the rich actually pay tax at anything like this rate?

Not according to Scott Greenberg of the Tax Foundation:

“The data shows that, between 1950 and 1959, the top 1 percent of taxpayers paid an average of 42.0 percent of their income in federal, state, and local taxes. Since then, the average effective tax rate of the top 1 percent has declined slightly overall. In 2014, the top 1 percent of taxpayers paid an average tax rate of 36.4 percent.”

The Tax Foundation, though not as rabidly anti-tax as some free market think tanks, obviously has its agenda. However, the data in Greenberg’s article comes from a paper by Thomas Piketty (and colleagues) which, one can safely assume, was not concocted in the service of radical libertarianism.

The figures are for all taxes, not just income taxes, and for the whole of the top 1%, not the sub-fraction that constitutes the super-rich. Nevertheless, they do indicate that very high marginal income tax rates, of the kind favoured by Ocasio-Cortez, don’t make that much of a difference to what the rich actually pay. There are various reasons for that, says Greenberg, but here’s the most pertinent:

“…it is very likely that the existence of a 91 percent bracket led to significant tax avoidance and lower reported income. There are many studies that show that, as marginal tax rates rise, income reported by taxpayers goes down.”

Under communism, the people of the Soviet Union used to joke ‘the bosses pretend to pay us and we pretend to work.’ Under capitalism, the bosses of the West can joke ‘the people pretend to tax us and we pretend to pay.’

As Warren Buffet reminded us in 2011, the super-rich aren’t even paying today’s much lower top rates. This presents a problem for the fantasy socialism of the populist left – if you can’t tax the super rich at 35% then how do get them to pay 70%?

But it’s also a problem for the equal and opposite extreme: if the slashing of top tax rates in the neoliberal era was so transformative, why are the tax havens still in business? And if tax cuts for the rich are so enlivening of enterprise, why is GDP and productivity growth slower now than in the decades when top tax rates were much higher?

Of course, it suits both sides to regress the tax debate to the 1970s – with simplistic ‘tax and spend’ slogans from the Left and equally simplistic ‘cut taxes and grow’ rhetoric from the Right. It also suits the media to focus on headline-friendly tax rates, rather than ask more penetrating questions about how income and wealth are generated in the first place. Whether tax policy distinguishes between income derived from genuinely productive entrepreneurship and the ill-gotten gains of rent-seeking speculation is much more important than where one sets the theoretical top rate.

Admittedly, there are those on both the radical Left and the free-market Right who do delve deeper into underlying problems like the rentier economy and who do explore novel solutions such as land value taxation. Yet this is complicated stuff that not only requires an effort of thought and explanation, but also blurs established ideological battle lines. For the old warhorses of the outdated Left-Right spectrum this a threat – indeed a prospect leading to the knackers’ yard.

Braindead statism needs unrepentant capitalism to stay relevant and vice versa.

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.


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3 years ago

I’m late for this party, but yeah, I had to laugh when I was driving down I-95 and saw a billboard trying to equate Biden and Harris with AOC, Omar, and Sanders. Even Kamala is far too corporatist and Establishment to be considered radical or socialist.