Newly elected representative and internet sensation Alexandria Ocasio-Cortez has proposed the idea of a 70% individual income tax rate, which would only impact those earning $10 million or more. The plan received a wave of mixed feelings, including a twitter response from House Republican Whip Steve Scalise claiming that the plan would “take away seventy percent of your income.”
Forbes explains that when analyzing a tax plan, it is necessary to analyze the difference between marginal tax rates and average tax rates. A marginal tax rate is the tax you need to pay on your next dollar of income. For example, if your next dollar of income falls within the thirty five percent bracket, the next dollar of your earnings is thirty five percent. An average tax is the taxes you have paid divided by your total income. This rate only affects taxable income after deductions, credits, and other adjustments are subtracted from the total income. An alternative method is measuring average tax rates by dividing the tax by the total income. Since deductions reduce the amount of taxed income, credits reduce the amount of tax itself, and the marginal rate is imposed solely on the last dollar of income. An average tax rate is much lower than a marginal tax rate.
During an interview with the CBS program “60 Minutes,” Alexandria Ocasio-Cortez had proposed that the tax imposed would cut back on carbon emissions and diminish America’s reliance on fossil fuels. Her so-called “Green New Deal” was established to reach goals such as achieving universal health care and converting all aspects of the U.S. economy to renewable sources of energy within the next twelve years, according to Time. Since these programs would naturally be expensive, Ocasio-Cortez’s plan is to have higher taxes on the rich. According to Business Insider, Ocasio-Cortez claims that “Once you get to the tippy-tops, on your ten millionth dollar, sometimes you see tax rates as high as sixty percent or seventy percent…as you climb up this ladder, you should be contributing more.”
CNBC states that former Federal Reserve Chairman Alan Greenspan asserted that raising the marginal tax rate to seventy percent on Americans making over $10 million would negatively impact the economy. Greenspan states that the move would have drastic consequences. Greenspan continues that the plan would result in “a significant drop in economic activity,” according to CNBC. In regards to taxes, Greenspan noted that the measure passed in 2017 “was an excellent tax cut” although Congress failed to come up with a method of paying for it. He states that the U.S. budget deficit for 2018 is likely to hit $1 trillion due to entitlement burdens that lawmakers have failed to address. Greenspan attests that “Nobody cares about deficits until it grips the economy in an inflationary way.” Greenspan remains pessimistic about the general economic outlook, and warns investors to “run for cover.” Greenspan vouches that the economy is reminiscent of the 1970s, a period of inflation and economic slowdown, serving as a call to arms to confront the current issue of entitlements.
Ocasio-Cortez has been faced with a wave of mixed responses, criticized by those who support lower taxes. However, a new poll from The Hill and Harris X reveals that more than a majority of voters, 59% to be exact, support the plan. Additionally, a gender gap was imminent in the survey, revealing 62% of women in support of the idea, with the remaining 38% rejecting it. Meanwhile, 55% of men supported the tax plan and 45% rejected it.
Douglas Holtz-Eakin, who advised President George W. Bush, agrees that governments led by either party will sooner or later need more revenue. He promotes taxing consumption, rather than income on economic grounds, but any new consumption taxes will strain America’s economy. Holtz-Eakin states that “We will need all the economic growth we can get, we need to control spending, and we need to raise revenue” and ends on an ominous note, declaring that “It’s going to be ugly.”