Tyler Cowen On 70% Tax Rates

See The Democrats’ Latest Idea on Taxes Will Only Help Trump: A top marginal income tax rate of 70 percent is bad economics and even worse politics. Excerpts:

"Let’s consider the economics of such a tax reform. Most of the income of America’s super-wealthy comes not from labor but from capital. It can be earned through capital gains, exercising stock options, and from corporations with possible foreign domiciles. Raising the marginal income tax rate to 70 percent will not, for better or worse, squeeze them very much.

Who then is most likely to pay more? Well, it depends on exactly which income level the higher rate would set in. But say you had a 70 percent rate at $500,000 and above. The biggest losers would be high-earning professionals in major cities and suburbs. Think doctors, lawyers, business consultants and the like, mostly on the coasts. A lot of those people live in blue states and are highly educated. More and more of them are educated women. All of these groups tend to be strongly anti-Trump, often passionately so.

And they are not just voters, they are donors, fundraisers, organizers and prominent voices in their communities. Some of them are even columnists for newspapers and web sites, or TV pundits. In essence, the Democrats would be giving some of their most influential supporters a huge pay cut. The party also would be telling them they can’t ever hope to build up much of a financial cushion for the future.

You might think this is all fair compared to what the government does to address the travails of a single mother trying to get by on $27,000 a year. But I don’t think that message will be especially well-received.

Keep in mind the 70 percent marginal tax rate is on the federal level. If you live in, say, California, the maximum state income tax rate is over 12 percent, which could increase your total marginal rate to more than 82 percent. (Just imagine if the 12 percent were added to an 80 percent marginal income tax rate.) If you then consider that some cities have income taxes, and the effect of sales taxes, then the true marginal rates go higher yet."

"By the way, you might be tempted to boost taxes on capital income too, or maybe instead of hitting the high-income professionals. But keep in mind that a lot of capital is internationally mobile, and the social democracies of Western Europe typically have low tax rates on capital income. (They tend to fund their additional expenditures through value-added taxes.) “Soak the rich,” however easy it may sound, doesn’t automatically make the government more just or responsible. Finally, Democrats should remember this: Their last president proposed cutting the corporate tax rate to 28 percent."