Last November, Alexandria Ocasio-Cortez, a 29-year-old with working-class roots, made waves by being the youngest woman to be elected to Congress. In a Jan. 4 interview with Anderson Cooper on CBS’ 60 Minutes program, she made news again by floating the idea of raising the top marginal tax rate to as high as 70 percent on income over $10 million. “People are going to have to start paying their fair share in taxes,” she said. “As you climb up this [income] ladder, you should be contributing more.”
Predictably, battle lines quickly were drawn between proponents and opponents of tax increases. At present, the top marginal federal tax rate is 37 percent. It is not the same as an average tax rate, which is the actual amount of taxes paid. The marginal tax rate is the tax paid on incremental income—it would be different rates for different slices of income. The first few bucks would be taxed at a different rate than the next rung up, and so on. Ocasio-Cortez’s proposal would tax amounts in excess of $10 million at 70 percent. Below $10 million, the rate is lower. However, the federal rate is in addition to state and local taxes.
The Penn Wharton Budget Model performed a detailed, though not exhaustive, analysis of the proposal. The model assumed that high-income owners of “pass through” businesses—where company profits flow to the owners—would reorganize as “C” corporations to lower their taxes, since the corporate tax rate is a much smaller 21 percent.
The Penn Wharton Budget Model’s conclusion: These tax avoidance activities “could cause the new 70 percent tax rate to raise only 43 percent of the revenue that would otherwise be raised.”
On the surface, the 70 percent marginal rate is likely to have difficulty achieving its revenue objective. For one, only a relatively small number of taxpayers even earn incomes of more than $10 million a year, according to Richard Prisinzano, senior economist with the Penn Wharton Budget Model, who previously worked at the U.S. Treasury Department’s Office of Tax Analysis. Prisinzano discusses the tax rate proposal on the Knowledge@Wharton radio show on SiriusXM.
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