A First Glance at an Eighth Income Tax Bracket

On January sixth, 2019, Congresswoman Alexandria Ocasio-Cortez vaguely proposed a potential tax increase for the richest in the United States to 70% (Cooper). Though this was certainly not an official proposal, both right and left wingers alike have begun to seriously discuss this suggestion. Because of a lack of specificity, considering that the proposal was brought up in casual conversation on CBS’s 60 minutes, serious questions have surfaced among economists and journalists.

From what we can gather, it is clear that the proposal suggests adding an eighth tax bracket to the current seven tax brackets pertaining to the federal income tax rate. The new bracket would only affect those in America who make more than something like 10 million dollars a year. The idea was intended to spark discussion pertaining to Ocasio-Cortez’s “Green New Deal” — a notably ambitious plan dedicated to ending the use of fossil fuels and transforming the United States into an eco-friendly country by 2030 (Ocasio-Cortez). It should again be noted, that what was said by Ocasio-Cortez did not elaborate on a particular plan, “[Y]ou look at our tax rates back in the ’60s and when you have a progressive tax rate system. Your tax rate, you know, let’s say, from zero to $75,000 may be ten percent or 15 percent, et cetera. But once you get to, like, the tippy tops—  on your 10 millionth dollar— sometimes you see tax rates as high as 60 or 70 percent. That doesn’t mean all $10 million are taxed at an extremely high rate, but it means that as you climb up this ladder you should be contributing more.”

It was this statement that truly sparked the debate. As one could see if one read her outline for the Green New Deal, nowhere is it mentioned that people would be taxed at a 70% income tax rate, and it should be taken into consideration that representative Alexandria Ocasio-Cortez backtracks on her statement when saying that she doesn’t intend to tax all “$10 million at an extremely high rate.”

Regardless, certain websites like the Tax Foundation.org have taken what she said very seriously and have done some calculations in an attempt to predict the potential impact of a 70% tax increase (Pomerleau, Kyle, and Huaqun Li). Firstly, the two economists responsible for the paper explain that because of the informal proposal, specifics about a 70% tax increase for those making $10 million or above are absent. Does this 70% tax income bracket only affect those who are single and only responsible for themselves, or does this also have an impact on those who are married or even those who are the sole provider in a single household, responsible for multiple individuals? There are multiple income tax brackets that are used depending on each individual’s financial situation (Josephson). This means that there are multiple possible versions of this new tax income bracket so more calculations are required (Pomerleau, Kyle, and Huaqun Li.).

The Washington Post contributed to the discussion by figuring out that if all Americans making over $10 million were taxed at 70%, the Federal Budget would increase to over $700 billion (Stein). However, the Tax Foundation points out that this figure does not account for the behavioral effects. What happens if, due to the nex taxes, those making over $10 million find ways to avoid the new tax? Even though it is illegal, there are loopholes through which it is possible, the most likely of which is sheltering income.

Possibly the best thing to do is to ask if what Ocasio-Cortez has said about the income tax brackets for the highest earners in America was, in fact, 70%. The answer is yes. In fact, the highest income tax bracket for the heads of households, married couples filing jointly, and singles was 70% depending on their income for the years between  1965 and 1981 (“Historical Income Tax Rates and Brackets, 1862-2013.”). Surprisingly, going back through the federal income tax brackets will reveal that prior to 1965, the top bracket was higher. In 1964, it was 74%, and between the years 1946 and 1963, it never dropped below 90%. This means that, with an exception of the record-breaking 94% during World War II, the highest income tax rate during Eisenhower’s administration was lower than that during FDR’s.

Knowing the historical context of such high-income tax rates, did economic growth stagnate? Again, surprisingly this was not the case. As you can see, from a graph of the GDP per capita based in 2009 dollars, the US has had steady economic growth throughout the 1950s and sixties (Jones, pp. 5).

Now that we know that it is possible to have the highest income tax bracket be at or above 70%, what stops the U.S. from seriously considering an addition of an eighth bracket? Currently, the highest federal income tax bracket is 37% for those making $500,000 or more (Josephson).  However, this is too high, some people argue. In fact, the ongoing national debate between Conservatives and Liberals comes down to a flat tax versus a progressive tax system. (Investopedia.) Because Conservatives generally want a flat tax system, it is difficult to move onto a change of the federal income tax brackets in the upward direction.

While a flat tax system seems fair at first glance, the numbers and rationale show otherwise. Everyone would be paying the same percentage, but not the same amount. Suppose one who is rich earns $200,000 and pays the same percentage of their income as someone who makes $15,000. Assume that one can live off of $15,000 by mostly relying on inferior goods. 15% of $200,000 is $30,000, meaning that the person who makes that kind of money is contributing $30,000 to the federal government. However, 15% of that poor person’s $15,000 is $2,250. The government only took a small amount of money in comparison to the $30,000, but to the poor individual, they’ve just lost a large amount of money. The rich person can still live comfortably without his/her $30,000, but the poor individual will require some serious financial planning. “A flat tax would ignore the differences between rich and poor taxpayers,” (Investopedia).

Reviewing what history has to tell us about high-income tax rates in the U.S., it is feasible to have an eighth bracket added to the federal tax income rates. However, there is no telling if it will ever pass until the time comes when it is formally proposed, rather than dropped in casual conversation.

 

Works Cited:

 

Stein, Jeff. “Ocasio-Cortez Wants Higher Taxes on Very Rich Americans. Here’s How Much

Money That Could Raise.” The Washington Post, WP Company, 5 Jan. 2019, www.washingtonpost.com/business/2019/01/05/ocasio-cortez-wants-higher-taxes-very-rich-americans-heres-how-much-money-could-that-raise/?noredirect=on&utm_term=.252d8afaf4a4.

 

An article covering the possibility of a 70% income tax rate bracket for those making $10 million or more.

 

Pomerleau, Kyle, and Huaqun Li. “How Much Revenue Would a 70% Top Tax Rate Raise? An

Initial Analysis.” Tax Foundation, Tax Foundation, 15 Mar. 2019, taxfoundation.org/70-tax/.

 

The Tax Foundation talking about the informal proposal put forth by Congresswoman Alexandria Ocasio-Cortez.

 

Ocasio-Cortez, Alexandria. “Green New Deal.” NPR, NPR, 7 Feb. 2019, 9:55 AM,

apps.npr.org/documents/document.html?id=5731829-Ocasio-Cortez-Green-New-Deal-Resolution.

 

This is the official outline for Ocasio-Cortez’s “Green New Deal.”

 

Cooper, Anderson. “Alexandria Ocasio-Cortez: The Rookie Congresswoman Challenging the

Democratic Establishment.” CBS News, CBS Interactive, 6 Jan. 2019, http://www.cbsnews.com/news/alexandria-ocasio-cortez-the-rookie-congresswoman-challenging-the-democratic-establishment-60-minutes-interview-full-transcript-2019-01-06/.

 

The transcript of the conversation between CBS correspondent Anderson Cooper and Representative Alexandria Ocasio-Cortez. This is where the debate about the 70% tax rate on the rich was first introduced.

 

McCaffery, Edward J. Fair Not Flat : How to Make the Tax System Better and Simpler.

University of Chicago Press, 2002. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=e000xna&AN=260187&site=ehost-live.

 

This is a book that goes in depth about tax rates and why a flat income tax is not fair.

 

Josephson, Amelia. “2018-2019 Federal Income Tax Brackets.” SmartAsset, SmartAsset, 18 Jan.

2019, smartasset.com/taxes/current-federal-income-tax-brackets.

 

Gillin, Joshua. “Income Tax Rates Were 90 Percent under Eisenhower, Sanders Says.”

@Politifact, 15 Nov. 2015, www.politifact.com/truth-o-meter/statements/2015/nov/15/bernie-s/income-tax-rates-were-90-percent-under-eisenhower-/.

 

This is an article published Politifact’s website that contributes to the ongoing discussion on whether or not the highest income tax rate during the 1950s was 90%.

 

Tax Foundation. “Historical Income Tax Rates and Brackets, 1862-2013.” Tax Foundation, Tax

Foundation, 10 Apr. 2018, taxfoundation.org/us-federal-individual-income-tax-rates-history-1913-2013-nominal-and-inflation-adjusted-brackets/.

 

This is the “U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets)”

 

Jones, Charles. “Chapter 1/ Growth at the Frontier.” The Facts of Economic Growth, by Charles I. Jones,

Stanford University, 2015, pp. 5,

https://web.stanford.edu/~chadj/facts.pdf.

 

This is a free textbook published by Stanford University on Economic Growth.

 

Wamhoff, Steve. “How to Think About the 70% Top Tax Rate Proposed by Ocasio-Cortez (and

Multiple Scholars).” ITEP, 8 Jan. 2019, itep.org/how-to-think-about-the-70-top-tax-rate-proposed-by-ocasio-cortez-and-multiple-scholars/.

 

Investopedia. “Is a Progressive Tax More Fair than a Flat Tax?” Investopedia, Investopedia, 12 Mar. 2019,

www.investopedia.com/ask/answers/042815/progressive-tax-more-fair-flat-tax.asp.