How Much Revenue Would a 70% Top Tax Rate Raise? An Initial Analysis

By Kyle Pomerleau & Huaqun Li of Tax Foundation. Excerpt:

"So far, Congresswoman Ocasio-Cortez has not been specific about her proposal for a 70 percent tax rate. However, her comments imply that she wants to add an eighth tax bracket of 70 percent on incomes over $10 million. What this means is that individuals would need to pay 70 cents for every dollar they report in taxable income over $10 million. It’s not clear yet whether it would apply only to ordinary income (wages, salaries, interest, business income), or if it would apply to all income (ordinary income plus long-term capital gains and qualified dividends).

Given the uncertainty around what income this top tax rate would apply to, we estimated two potential proposals. Proposal 1 would add an 8^th tax bracket of 70 percent over $10 million on ordinary income. Qualified income would remain taxed at a top rate of 20 percent. Proposal 2 would add an 8^th bracket of 70 percent over $10 million but apply it to all income—both ordinary income and qualified income. Both proposals would be applied to taxable income over $10 million and the brackets would not be adjusted for filing status. The threshold would remain $10 million whether a tax filer was single or married filing jointly.

We estimate that applying a new 70% tax rate on ordinary income over $10 million (proposal 1) would raise about $291 billion between 2019 and 2028. While taxpayers would react to proposal 1 by reducing taxable income, the effect wouldn’t be significant. As a result, the proposal would still raise revenue each year over the budget window.

Counterintuitively, if the 70 percent tax bracket were to apply to all income over $10 million, the proposal would raise much less revenue. We estimate that proposal 2 would raise $51.4 billion between 2019 and 2028 and lose revenue in the first two years of its enactment.


The reason why a 70% tax rate on all income over $10 million would raise very little revenue is due to how taxpayers would react to the much higher tax rate on capital gains. Under current law, capital gains are taxed only when they are “realized” — that is, when the assets are sold. This means that individuals can effectively choose when to pay the tax. As a result, capital gains are very responsive to the tax rate.

For capital gains over the $10 million threshold, the tax rate would increase from the current 23.8 percent (the 20 percent statutory tax rate plus the 3.8 percent net investment income tax) to 73.8 percent. That is a 210 percent increase. This would result in a significant decline in capital gains realizations that would otherwise be subject to the new tax rate. We estimate that realizations that would be subject to the $10 million tax bracket would be permanently 77 percent lower than they otherwise would have been. As a result, federal income tax revenue from capital gains would fall and offset a large portion of the additional tax revenue from taxing ordinary income.

On a dynamic basis, we estimate that Proposal 1 (applying the top tax rate to only ordinary income) would raise $189 billion between 2019 and 2028. In contrast, we estimate that Proposal 2 would end up losing $63.5 billion over the same period.

Proposal 1 would increase the marginal tax rate on wage income, which would reduce hours worked by taxpayers impacted by this tax bracket. In addition, the cost of noncorporate capital would rise as profits from noncorporate businesses would be taxed at a much higher rate. Both effects would narrow the income and payroll tax base, resulting in less additional revenue than on a conventional basis.

Proposal 2 would have similar economic effects as proposal 1. The marginal tax rate on wages and the cost of capital for noncorporate businesses would both be higher. In addition, proposal 2 would also impact the corporate cost of capital by applying the higher tax rate to capital gains and dividends. However, that additional impact due to the taxation of capital gains and dividends would be small. Individuals who react by deferring capital gains would greatly reduce their effective tax rate or, ultimately, completely avoid the tax through step-up in basis at death.

The reason proposal 2 ends up losing revenue is not because the negative dynamic feedback is particularly large. In fact, the dynamic feed back of proposal 1 and proposal 2 are very similar. The reason proposal 2 ends up losing revenue is because the tax base, on a conventional basis, is narrower to start with due to much lower capital gains realizations. Once the negative dynamic revenue feedback is incorporated, revenue for the federal government ultimately falls."