Taxing the Rich and Philosophy /Economics

The Philosophical Roots of Alexandria Ocasio-Cortez’s 70 Percent Tax Plan


By Micah Johnson
January 16, 2019
Slate


AOC’s tax proposal finds inspiration not in Karl Marx, but in mainstream American political philosophy. How we tax the rich depends on why we tax the rich, and AOC’s proposal reflects a surprisingly moderate view of economic justice.



Alexandria Ocasio-Cortez outside the Capitol in Washington on Jan. 4. , Saul Loeb/AFP/Getty Images






Earlier this month, Alexandria Ocasio-Cortez floated the idea of a 70 percent tax rate on incomes over $10 million. Critics piled on to call the tax “astronomical,” “higher than Communist China”—some even likened it to slavery. On Tuesday, former Wisconsin Gov. Scott Walker comparedthe multimillionaires’ tax to taking money from fifth-graders after doing their chores, then referenced the fall of the Soviet Union as evidence that “socialism” doesn’t work.

The irony of all this is that AOC’s tax proposal finds inspiration not in Karl Marx, but in mainstream American political philosophy. How we tax the rich depends on why we tax the rich, and AOC’s proposal reflects a surprisingly moderate view of economic justice.

Her plan can trace its intellectual lineage to John Rawls, the giant of American political philosophy. His 1971 classic, A Theory of Justice, defends a vision of liberal society that still appeals to most Americans: equal rights, a market economy, and a welfare state.

Central to Rawls’ philosophy is a defense of inequality. If people are born free and equal, why would we agree to live in an unequal society? His answer is that we can all do better if we allow some inequality. It’s OK that business owners earn more than others—but only because the financial reward acts as an incentive for entrepreneurs to create jobs and produce goods that improve the lives of the less well-off.

In other words: A rising tide is just, as long as it lifts all boats.

From the perspective of justice, it’s therefore important to distinguish the interests of those at the very top (the multimillionaires) from the interests of everyone else.

John Rawls would applaud AOC’s tax as being wholly consistent with the principles of justice.

Multimillionaires would certainly lose money under AOC’s tax proposal. How much does that matter? Economists typically appeal to utilitarian reasoningto argue that it matters very little: The superrich can buy nearly anything under the sun either way, so a few hundred grand here or there has a negligible effect on their well-being. And just 16,000 Americansmake more than $10 million per year—they’re literally the 1 percent of the 1 percent—making any negative impact of the tax even tinier.

This utilitarian line of argument might be compelling, but it misses the larger question of justice. According to Rawls, it doesn’t matter if particular levels of inequality and taxation are good for the rich. What matters is whether those levels are good for everyone else—if we’re debating the marginal utility of a third yacht, we’re asking the wrong question. What matters for justice is how AOC’s tax would impact everyone who’s not a multimillionaire. Would raising taxes on the superrich hurt the economy as a whole, leaving everyone else worse off?

Here’s where economic research comes in. It turns out that when their taxes go up, multimillionaires do report less taxable income. For the wealthiest Americans, this means that higher taxes simultaneously trim the tax base and capture a larger share of it. Economists Emmanuel Saez and Peter Diamond (a Nobel laureate) have estimated the tax rate where the gains offset the losses: According to them, it comes out to 73 percent. That’s the tax rate that they say maximizes revenue from the superrich, even after accounting for the fact that higher taxes discourage the accumulation of taxable income at the margin.

But wait a minute: If the superrich make less money, doesn’t that hurt economic activity—even if tax revenue is maximized?

Paul Krugman, another Nobel Prize–winning economist, argues that it doesn’t. The crux of his argument is straightforward: Multimillionaires do generate economic activity, but if left to their own devices in a competitive market, they keep the winnings for themselves. Everyone else benefits only when multimillionaires get taxed, which returns some of the money back to the economy. So higher taxes might cause the superrich to generate slightly less income, but for everyone else, the benefits still outweigh the costs—at least until the tax reaches about 73 percent, according to Saez and Diamond.

In short, when we maximize the revenue collected from multimillionaires, we maximize the economic welfare of everyone else in society (because of increased social spending, lower tax rates for others, or both). For this reason, John Rawls would applaud AOC’s tax as being wholly consistent with the principles of justice.

Unsurprisingly, Rawls has outspoken critics on both the right and left. On the right, libertarians argue that taxation amounts to theft, no matter whom it helps or hurts. If Krugman is correct that the rest of the economy is better off when multimillionaires are taxed at a top rate of 70 percent or higher, the surprising consequence is that lower rates can be justified only by this kind of libertarian argument, not the typical Republican appeal to economic growth.

On the left, egalitarians argue that inequality has inherently poisonous effects on politics and society, and so the goal of taxing the rich isn’t just to raise revenue—it’s also to bring multimillionaires down a rung on the economic ladder. A tax bracket above 70 or 80 percent would need to rely on this kind of egalitarian argument, not on the typical Democratic justification of raising revenue for social programs.

Taking money from fifth-graders might be unpopular, but taxing multimillionaires has deep roots in American ideas about economic justice.