The question of just how much the nation’s richest people should pay in taxes has been an ongoing debate for almost as long as the country has existed. More recently, it has sprung into the forefront with proposals from Democratic politicians like Rep. Alexandria Ocasio-Cortez of New York and Sen. Elizabeth Warren of Massachusetts that call for new taxes on the super-rich.
But for many Americans, it can be difficult to put these proposals into a context that clearly explains why they matter. After all, if your primary concerns are figuring out the best way to pay off both your mortgage and bassoon lessons for your daughter Sara, you’re likely less inclined to care about how the country should tax those comfortably paying off their third yachts and private performances from world-renowned bassoonist Asger Svendsen.
The truth is, how taxes are levied on the wealthiest people can have ripple effects that carry down to those people in the lowest tax brackets. So, here’s a look at how some of these proposals might — and might not — affect you.
Different Approaches to Raising Taxes on the Rich
The proposals from Ocasio-Cortez and Warren represent two different proposals on how to raise taxes on the rich. The Ocasio-Cortez proposal would simply add a new tax bracket with a marginal tax rate of 70 percent for incomes over $10 million. Meanwhile, Warren’s proposal is considerably more revolutionary: a wealth tax of 2 percent on fortunes over $50 million rising to 3 percent once you hit $1 billion. This would be a tax on existing fortunes, similar in nature to something like property taxes.
A 70% Top Tax Rate Won’t Necessarily Mean a Lot More Tax Revenue
Odds are good that — unless you’re reading this on a gold-plated iPad — you’re probably not making $10 million a year and won’t be anytime soon. However, even though you’re not among the top 0.05 percent of earners, you might think that the money raised would lead to Congress shoring up Social Security or even giving you a big tax cut.
The proposal is estimated to raise about $72 billion a year, which isn’t exactly a huge amount in the context of the federal government. That’s about 8.8 percent of our current deficit of $897 billion and less than half the projected annual shortfall for Social Security beginning in 2035.
If that number’s a bit of a let-down, it’s because raising income taxes doesn’t necessarily mean hitting the super-rich up for a lot more in taxes. Many of the richest people in America primarily owe their wealth to investments, translating to a much lower effective tax rate. So, while Jeff Bezos might be worth about $140 billion, over $130 billion of that is his Amazon stock. He won’t owe any taxes on that until he sells his shares, and even then he would pay the long-term capital gains rate of 20 percent. Bezos’ annual salary? A little over $80,000 a year.
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But What About the Economy?
However, if your concern is more about how your bottom line will take a hit because such a tax would hamper economic growth, well, that’s a much more complicated question and one without a satisfying answer. Economists have been debating the pros and cons of raising taxes on the rich for decades, and they aren’t really any closer to a consensus than when they started.
That said, it’s worth noting that it’s not uncharted territory. The top tax bracket was as high as 90 percent from the 1940s through the 1960s, and it was at 70 percent as recently as 1980. Economists might continue to debate what effect that top tax rate had on economic growth for those periods — as they are wont to do — but the idea that the economy would be outright crippled by a 70 percent tax rate seems a little outlandish.
Warren’s Wonky Wealth Tax
But what about this wealth tax proposed by Elizabeth Warren, then? Most of you are probably looking at that $50 million threshold and thinking to yourself, “Wow, should I be so lucky? With that much money, I could probably hire Asger Svendsen to play Sara’s next birthday!”
Unlike the Ocasio-Cortez pitch, this proposal would address the difference between “income” and “wealth.” While Jeff Bezos might manage to duck paying taxes on almost all of his fortune under the Ocasio-Cortez proposal, he would theoretically owe over $4 billion a year under Warren’s plan.
And that would translate to a lot more tax revenue. The proposal is projected by two UC Berkeley economists to raise about $275 billion a year in additional taxes from just 75,000 families. That would account for almost a third of the current deficit or cover the projected shortfall for Social Security after 2035 with about $80 billion a year to spare.
A Wealth Tax Could Present Some Serious Difficulties
But if this seems like a bulletproof plan for saving Social Security, it’s worth noting that it’s been attempted elsewhere with results that were middling at best. France, for instance, saw 42,000 of its millionaires leave the country from 2000 to 2012 trying to escape paying the tax and killed the policy just last year.
And while Warren’s proposal includes ways to prevent the super-rich from just picking up and leaving — or avoiding the tax by moving assets offshore — it’s a safe bet that some might leave anyway. What’s more, those that stay would probably try to find a variety of creative accounting gimmicks to understate their wealth. This could create a nightmare for the IRS trying to nail down a fair value for every asset owned by all 75,000 of those families, year in and year out. If you think the current process for assessing property taxes is a nightmare, you can only imagine how complex this could get.
The Effect On You Would Be Indirect
At the end of the day, the direct effects on you for either of these taxes on the ultra-rich would be unclear. You certainly might see some benefits from the federal government increasing tax revenues — especially if it means ensuring the solvency of Social Security — but whether the new taxes would have a major effect on economic growth is still up for debate. So, for most of America, this is probably an issue that comes down more to ideology than dollar and cents — your opinion likely has more to do with how you approach the ballot box rather than your checkbook.
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