By Paul Krugman
Opinion Columnist
Representatives
Alexandria Ocasio-Cortez of New York and Jahana Hayes of Connecticut on
the House floor in Washington on Thursday.CreditCarolyn Kaster/Associated Press
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I
have no idea how well Alexandria Ocasio-Cortez will perform as a member
of Congress. But her election is already serving a valuable purpose.
You see, the mere thought of having a young, articulate, telegenic
nonwhite woman serve is driving many on the right mad — and in their
madness they’re inadvertently revealing their true selves.
Some
of the revelations are cultural: The hysteria over a video of AOC
dancing in college says volumes, not about her, but about the hysterics.
But in some ways the more important revelations are intellectual: The
right’s denunciation of AOC’s “insane” policy ideas serves as a very
good reminder of who is actually insane.
The
controversy of the moment involves AOC’s advocacy of a tax rate of
70-80 percent on very high incomes, which is obviously crazy, right? I
mean, who thinks that makes sense? Only ignorant people like … um, Peter
Diamond, Nobel laureate in economics and arguably the world’s leading
expert on public finance. (Although Republicans blocked him from an
appointment to the Federal Reserve Board with claims that he was unqualified.
Really.) And it’s a policy nobody has ever implemented, aside from …
the United States, for 35 years after World War II — including the most
successful period of economic growth in our history.
To be more specific, Diamond, in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rate
to be 73 percent. Some put it higher: Christina Romer, top
macroeconomist and former head of President Obama’s Council of Economic
Advisers, estimates it at more than 80 percent.
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Where
do these numbers come from? Underlying the Diamond-Saez analysis are
two propositions: Diminishing marginal utility and competitive markets.
Diminishing
marginal utility is the common-sense notion that an extra dollar is
worth a lot less in satisfaction to people with very high incomes than
to those with low incomes. Give a family with an annual income of
$20,000 an extra $1,000 and it will make a big difference to their
lives. Give a guy who makes $1 million an extra thousand and he’ll
barely notice it.
What this implies
for economic policy is that we shouldn’t care what a policy does to the
incomes of the very rich. A policy that makes the rich a bit poorer will
affect only a handful of people, and will barely affect their life
satisfaction, since they will still be able to buy whatever they want.
So
why not tax them at 100 percent? The answer is that this would
eliminate any incentive to do whatever it is they do to earn that much
money, which would hurt the economy. In other words, tax policy toward
the rich should have nothing to do with the interests of the rich, per
se, but should only be concerned with how incentive effects change the
behavior of the rich, and how this affects the rest of the population.
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But
here’s where competitive markets come in. In a perfectly competitive
economy, with no monopoly power or other distortions — which is the kind
of economy conservatives want us to believe we have — everyone gets
paid his or her marginal product. That is, if you get paid $1000 an
hour, it’s because each extra hour you work adds $1000 worth to the
economy’s output.
In that case,
however, why do we care how hard the rich work? If a rich man works an
extra hour, adding $1000 to the economy, but gets paid $1000 for his
efforts, the combined income of everyone else doesn’t change, does it?
Ah, but it does — because he pays taxes on that extra $1000. So the
social benefit from getting high-income individuals to work a bit harder
is the tax revenue generated by that extra effort — and conversely the
cost of their working less is the reduction in the taxes they pay.
Or
to put it a bit more succinctly, when taxing the rich, all we should
care about is how much revenue we raise. The optimal tax rate on people
with very high incomes is the rate that raises the maximum possible
revenue.
And that’s something we can
estimate, given evidence on how responsive the pre-tax income of the
wealthy actually is to tax rates. As I said, Diamond and Saez put the
optimal rate at 73 percent, Romer at over 80 percent — which is
consistent with what AOC said.
An
aside: What if we take into account the reality that markets aren’t
perfectly competitive, that there’s a lot of monopoly power out there?
The answer is that this almost surely makes the case for even higher tax
rates, since high-income people presumably get a lot of those monopoly
rents.
So AOC, far from showing her
craziness, is fully in line with serious economic research. (I hear that
she’s been talking to some very good economists.) Her critics, on the
other hand, do indeed have crazy policy ideas — and tax policy is at the
heart of the crazy.
You see,
Republicans almost universally advocate low taxes on the wealthy, based
on the claim that tax cuts at the top will have huge beneficial effects
on the economy. This claim rests on research by … well, nobody. There
isn’t any body of serious work supporting G.O.P. tax ideas, because the
evidence is overwhelmingly against those ideas.
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Look
at the history of top marginal income tax rates (left) versus growth in
real GDP per capita (right, measured over 10 years, to smooth out
short-run fluctuations.):
Top tax rates and growthCreditTax Policy Center, BEA
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What
we see is that America used to have very high tax rates on the rich —
higher even than those AOC is proposing — and did just fine. Since then
tax rates have come way down, and if anything the economy has done less
well.
Why do Republicans adhere to a
tax theory that has no support from nonpartisan economists and is
refuted by all available data? Well, ask who benefits from low taxes on
the rich, and it’s obvious.
And
because the party’s coffers demand adherence to nonsense economics, the
party prefers “economists” who are obvious frauds and can’t even fake their numbers effectively.
Which
brings me back to AOC, and the constant effort to portray her as flaky
and ignorant. Well, on the tax issue she’s just saying what good
economists say; and she definitely knows more economics than almost
everyone in the G.O.P. caucus, not least because she doesn’t “know”
things that aren’t true.
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