Tax Policy

What Would a 70% Tax Bracket Look Like?

Even with a 70% tax bracket the Green New Deal could not be fully funded from increased tax revenue.

In an interview on CBS’ 60 Minutes Alexandria Ocasio-Cortez, newly minted U.S. Representative for New York’s 14th congressional district, floated the idea of introducing a 70 percent top tax rate to fund a Green New Deal.

This statement quickly sparked debate from both conservative and liberal legislators, economist and political pundits on whether a 70 percent tax bracket is radical or sensible tax policy.

Regardless of your political views you can’t have a policy debate on the expanding role of government in tackling issues like climate change and income inequality without at least considering the role of tax policy.

Specifically, what would a 70% tax bracket look like? How much revenue will it generate? What are the historical justifications of a 70% tax bracket? And, what are the economic impacts of having such a high top tax bracket?

What is The Green New Deal?

The Green New Deal Ocasio-Cortez is referring to is a set of progressive policies to address the growing concerns over climate change and income inequality. Although there has yet to be a formal piece of legislation drafted to accomplish the goals of a Green New Deal much of the policy proposals being floated are contained in draft form.

Specifically, the policy proposals center around 2 major legislative goals:

  1. Decarbonize the economy within 10 years by making massive investments into the green economy including technology, industries, expertise, products & services.
  2. Virtually eliminate poverty through a government jobs guarantee, basic income programs, universal health care programs and investment in historically marginalized communities.

These policy proposals are not only expansive but they are also extremely expensive – that’s why a major part of the policy proposal of a Green New Deal is funding mechanisms behind such ambitious government programs.

Take for example Medicare for all which would cost roughly $32.6 trillion over the next 10 years. To put this figure into perspective, federal government spending would roughly double over the next decade.

To fully fund such an expansive program without adding to the deficit you’d have to implement one of the largest tax increases since the original New Deal.

Historical Context: The New Deal and Income Taxes

The modern U.S. tax system, as we know it today, has its roots in the New Deal era. In an attempt to finance both the creation of new government programs and the U.S. involvement in World War II the U.S. government introduced a payroll tax as well as an increase in top marginal tax rates.

Prior to the passage of the 16th amendment the U.S. government was largely funded by tariffs and excise taxes. Although there was a small income tax imposed during the Civil War, the modern federal income tax system wasn’t born until the passage of the Revenue Act of 1913.

The original income tax was fairly insignificant considering it only imposed a 1% tax on net personal incomes above $3,000, with a 6% surtax on incomes above $500,000. But by 1918, the top rate of the income tax was increased to 77% (on income over $1,000,000, equivalent of $16,717,815 in 2018 dollars) to finance World War I. But even with such high marginal tax rates the effective tax on the wealthiest Americans was still historically low.

It wasn’t until World War II and the passage of the New Deal did federal income tax impact significantly more taxpayers and have a broader impact on the U.S. economy as a whole. As shown in the above chart, federal revenue soared to 20% of GDP in the 1940s and has remained high based on historical standards.

As government programs initiated by the New Deal began to expand and offer more generous benefits the federal government expanded payroll taxes significantly. Tax policy shifted away from taxing the top .01% of the population to broadening the tax base and collecting revenue across the board.

Tracking Marginal Tax Rates

Throughout the history of the federal income tax the top income tax rates remained relatively high. As recently as the 1980’s the top tax bracket hovered at 50% and in the early 60s the top tax bracket was 91%.

Although it’s easy to point to high top marginal tax rates in history as justification to implement similar provisions in our current tax regime this argument tends to be misleading and doesn’t compare apples to apples. The tax code today is vastly different than the tax code in the 80s let alone in the 60s.

Instead, the best way to look at tax policy across the decades is the effective tax rate because it shows the actual percentage of tax paid after factoring in credits, deductions and loopholes.

Even though top marginal tax rates fell from 91% to 39.6% the actual effective tax rate on the top 1% fell less drastically. Although the drop in top marginal tax rates may have contributed to the decline in effective tax rates on the top 1% the cutting of the top rates doesn’t tell the entire story.

How Much Revenue Would a 70% Tax Bracket Collect?

In 2015 the top 1% reported a cumulative adjusted gross income of roughly $2 trillion. To fall into the top 1% a taxpayer would have to report income in excess of $567,697. The collective 1,412,046 taxpayers who accounted for the top 1% of income earners in 2015 paid $567 billion in income tax or approximately 39.04% of all income tax collected.

So what if the effective federal income tax rate of the 1% was 70% and not the reported 27.10% for 2015? If the federal income tax regime imposed an effective tax rate of 70% the federal government would collect an additional $833 billion annually. This would raise close to $10 trillion over the next decade and pay for a third of Medicare For All.

Now, of course the proposals being put forth are not calling for an effective tax rate of 70% but instead a marginal tax rate of 70% on earnings in excess of $10 million. This would impact the top .05% and would collect over $100 billion annually.

I put forth the first example as an extreme example to showcase the fact that even the most progressive tax imaginable could not pay for the expansive government programs being proposed.

Consider this scenario – in order for the federal government to fund Medicare For All over the next decade the effective tax rate of the top 50% of taxpayers would have to go from the current 15.71% effective rate to over 50%. Keep in mind this 50% effective tax rate doesn’t include state and local taxes.

How Would The Green New Deal Be Funded?

As illustrated above, a government program like the Green New Deal cannot be funded completely on the backs of the 1%. Effective tax rates would have to climb significantly for the majority of taxpayers to even cover a portion of the cost of these government programs.

One could argue that the average American would be better off with ‘free’ health insurance, tuition free education, a jobs guarantee from the federal government and a carbon neutral economy but the economic impacts of such a shift would almost be impossible to measure.

But the question still remains, how would a Green New Deal be funded? According to the draft proposal itself, “the majority of financing of the Plan shall be accomplished by the federal government, using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks, public venture funds and such other vehicles or structures that the select committee deems appropriate.” In layman’s terms the program will be funded primarily through debt financing.

To put this into perspective, the financing of the Green New Deal would be the largest increase in the federal debt as a share of GDP since the U.S. involvement in World War II.

So the question then becomes – is the fight against income inequality and climate change as important as winning World War II? Regardless of your answer, policy proposals of this magnitude should be taken seriously. Not because they are necessarily correct but because their impacts on the greater economy can have long lasting economic and tax implications.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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