Cowen has Misled Us On AOC’s Marginal Tax Rate Idea

Tyler Cowen is my favorite blogger. He is completely unique, brilliant, and infinitely curious. But he just wrote a really bad article for Bloomberg on how The Democrats’ Latest Idea on Taxes Will Only Help Trump. He is responding to the comments by Alexandra Ocasio-Cortez during a recent 60 Minutes interview where she expressed support for additional tax brackets on the high end of the income distribution and a significantly higher top marginal tax rate for those highest brackets.

AOC’s Statement About Marginal Tax Rates

I think Tyler makes two errors in critiquing Rep. Ocasio-Cortez’s position, which I characterize as follows:

• A “Green New Deal” would have to be financed by higher taxes
• The tax hike could take the form of a more progressive tax code
• The more progressive tax code could feature a marginal tax rate of 70% on those earning $10mn or more a year

Two Errors

I think the main point of Tyler’s piece is that talking about higher taxes is politically unwise for Democrats right now. I agree with this. But I think he makes one small error and one really big error in his analysis of why, in addition to being bad politics, this idea is bad economics.

The Little Error: What Tax Rate Was AOC Talking About?

Rep. Ocasio-Cortez was doing a TV interview, not presenting a formal policy proposal. She doesn’t state exactly what tax rate(s) she’s talking about. But Cowen assumes that she’s talking about the top federalmarginal tax rate, and argues that if you layer in state and city taxes on top you could start getting really high all-in marginal tax rates.

Keep in mind the 70 percent marginal tax rate is on the federal level. If you live in, say, California, the maximum state income tax rate is over 12 percent, which could increase your total marginal rate to more than 82 percent. (Just imagine if the 12 percent were added to an 80 percent marginal income tax rate.) If you then consider that some cities have income taxes, and the effect of sales taxes, then the true marginal rates go higher yet.

But hold up– why assume that Rep. Ocasio-Cortez wasn’t already talking about all-in marginal rates? If I take a plain-English stab at what the words “marginal tax rate” mean, I’d say they mean that for the next dollar I earn, how much do I pay in taxes? In the absence of a label, I think the default interpretation of Rep. Ocasio-Cortez’s statement is that she is advocating for the wealthiest Americans to face total marginal tax rates of around 70% including state and local taxes.

We can argue about whether she was probably talking about federal marginal rates, or all-in. But in the absence of clarification in the form of a proposal, I don’t see a reason to force the word “federal” in, when she didn’t use it herself. This is a little bit straw-man, but it’s nothing compared to the straw-man offered in Tyler’s second error.

The Big Error: Where did this $500k Bracket Come From?

One area where Rep. Ocasio-Cortez was specific was the level of income where she imagined this high marginal tax rate kicking in. She directly pegged the 70% marginal rate to incomes of $10 million. She doesn’t go into detail on how marginal tax rates are shaped at lower incomes, all we know about her idea (again, not a proposal– floated on a TV interview).

So this part of Tyler’s article really drives me nuts:

Who then is most likely to pay more? Well, it depends on exactly which income level the higher rate would set in. But say you had a 70 percent rate at $500,000 and above. The biggest losers would be high-earning professionals in major cities and suburbs. Think doctors, lawyers, business consultants and the like, mostly on the coasts. A lot of those people live in blue states and are highly educated. More and more of them are educated women. All of these groups tend to be strongly anti-Trump, often passionately so.
And they are not just voters, they are donors, fundraisers, organizers and prominent voices in their communities. Some of them are even columnists for newspapers and web sites, or TV pundits. In essence, the Democrats would be giving some of their most influential supporters a huge pay cut. The party also would be telling them they can’t ever hope to build up much of a financial cushion for the future.

I really, really, respect Tyler Cowen. Tyler is just a lot smarter than me. My ex ante assumption is that if I disagree with Tyler on something, it’s because I’m wrong about it. But even so, I don’t see a way to look at this other than a deliberate mischaracterization of Rep. Ocasio-Cortez’s position.

There’s Only Two Numbers in AOC’s Idea- Why Change One?

Tyler takes Rep. Ocasio-Cortez’s $10mn top bracket for hedge fund wizards and movie stars and pulls it all the way down to $500k. There’s no reason for this. Her idea was so light on details– it was clearly the broad strokes of an idea for how you could work a Green New Deal. Who knows if a high marginal tax rate on ultra rich individuals would have any impact on the budget whatsoever. So sure, have a debate on whether her idea would be sufficient to do anything meaningful for the environment. But why on earth would you take one of the two actual hard numbers she floated and change it to something else at random?

The entire reason Rep. Ocasio-Cortez picked the $10 million level was to express the idea that, to the extent possible, tax hikes should be targeted to unambiguously rich people. Not doctors and lawyers. Not small business owners. In his article, Tyler just ignores this key component of her idea and invents a completely different tax idea to argue against.

Good for AOC!

I don’t have much else to say about this other than Tyler’s work is normally amazing and you should still read his stuff all the time, just like I do, and will continue to. And, he’s completely right about this being bad politics. Rep. Ocasio-Cortez should probably talk less about tax hikes. Although on the other hand, kudos to her for staking out a position on how to pay for a policy proposal. It’s easy to say you want to do Project X and you’ll pay for it through “tax reform”, “loophole closing”, “unspecified cuts”, etc. She wanted to talk about a Green New Deal, Cooper pushed her on how to pay, and she threw an idea out. Good for her!