Every so often, we have moments in America when the political class starts feeling enormous pressure to significantly "tax the rich."
Credit newly sworn-in member of Congress Alexandria Ocasio-Cortez with helping to spark one the most recent one. On "60 Minutes" Sunday, the break-out political star went before a national audience and called for nearly doubling—to as high as 70 percent—the tax rate the super-rich face on income over $10 million.
That call has captured the attention of public and pundits alike. For good reason. No high-profile national figure has gone on national television and advocated for giving the rich such a serious soak since… well, since before we had national television.
Anti-tax Republicans now feel the ground shaking. An alarmed Grover Norquist, the patron saint of GOP never-tax-the-rich piety, jumped onto Fox News after Ocasio-Cortez appeared on "60 Minutes" and decried her tax proposal as "the opening shot in a renewed war against taxpayers." (In a tweet, he even likened taxes on the wealthy to slavery.)
More progressively inclined observers, meanwhile, are welcoming the bold new Ocasio-Cortez tax pitch. They're pointing out that Americans have a long, proud—and relatively recent—history of subjecting the rich to hefty tax rates. In the 1960s, for instance, the top rate on income above $400,000—over $3 million in today's dollars—never dipped below 70 percent. In the 1950s, under Republican Dwight Eisenhower, that rate never dipped below 91 percent.
These steep tax rates helped usher in a golden age for America's middle class, as average real incomes doubled in the quarter-century after World War II. But America's tax rates on the rich took a nose-dive under Ronald Reagan and haven't recovered since.
The nation, meanwhile, has shifted into economic reverse. Average Americans no longer feel economically secure. Incomes for America's top 0.1 percent, by contrast, have soared over 15 times faster than average incomes in the bottom 90 percent.
None of this, economists have reminded us over recent years, should surprise us. High tax rates on high incomes have all sorts of redeeming economic value. They rev up our productive vitality.
Read more: Alexandria Ocasio-Cortez to join influential House committee
So should we all simply cheer on a reintroduction of the same tax-the-rich regimen we had back in the mid-20th century? Not so fast. That regimen did help work wonders. But the stiff tax rates of post-World War II America had a fatal flaw: They couldn't be sustained.
Why not? Steeply progressive tax rates, as traditionally structured, have a built-in political asymmetry. The rich facing top tax rates of 70 percent and up have an intense personal stake in doing everything possible to knock those rates down.
They can see an immediate benefit from obliterating steep rates.For everyone else, that immediacy doesn't kick in. The benefits average taxpayers see from high tax rates on the rich play out far more subtly.
High tax rates on high incomes, for instance, give top corporate executives less incentive to exploit workers and shortchange consumers. Why should executives make the effort to squeeze still another dollar of profit out of workers or consumers, for instance, when the personal gains that squeezing might bring would face a tax rate of 70 or 90 percent?
Incentives matter. Traditionally structured progressive tax rates simply give the rich too much incentive to pound away against these rates politically until they pound them out of existence. (And they leave plenty of resources left over for them to do it.)
But we could change those incentives—by revamping how we structure progressive tax systems.
How so? Instead of keying the threshold for steep tax rates at a specific dollar figure at the top, like the $10 million Ocasio-Cortez suggests, we could link that threshold to incomes at the bottom. We could trigger a 70 percent—or higher—federal tax rate at a multiple of the federal minimum wage. Any annual income above, say, 100 or 500 times that wage minimum would trigger the steep rate.
With this tweak in place, our nation's richest would suddenly have a vested personal interest in the well-being of our nation's poorest. The higher the minimum wage, the higher their own after-tax income.
Linking top tax rates on the wealthy to our minimum wage would, by the same token, give average Americans a much more direct personal stake in the taxes rich people pay. The higher the minimum wage, the greater the economic pressure on employers to raise wages above the minimum.
Average Americans understand how higher minimum wages impact the overall wage structure. They wouldn't look kindly on any attempts by the wealthy to de-link stiff tax rates at the top to society's wage minimum.
And all these dynamics speak to still another lesson we can draw from the demise of our last century's steep tax rates on America's rich: We can't put all our eggs—all our hopes for a more equal society—in a redistribution basket. Redistribution alone can never be enough.
We need to battle for an economy that generates less inequality in the first place—otherwise the rich will simply use their built-in advantages to dismantle those redistributive structures, as they have in the United States since the Reagan era. That means working to alter the institutions and policies that funnel—"predistribute"—excessive rewards to the already wealthy.
How we structure our tax system can impact this predistribution. So let's get this structure right.
Sam Pizzigati, an Institute for Policy Studies associate fellow, co-edits Inequality.org. His latest book: The Case for a Maximum Wage (Polity)
The views expressed in this article are the author's own.
Uncommon Knowledge
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