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The Bad Economics of Soaking the Rich




By Matthew Pinna –

Recently, Paul Krugman of the New York Times published a column in defense of Congresswoman Alexandria Ocasio-Cortez’s comments to CNN’s Anderson Cooper that a 70% top marginal income tax rate would be needed to fund her Green New Deal. Chiefly among his other points was his belief that her plan—high taxes and all—is actually economically well-informed.

Hypothesizing whether or not AOC even understood the economics behind her statement as he says she does is irrelevant; although we can probably come to certain conclusions about the same Congresswoman who said that healthcare costs are driven partly by “funeral expenses,” a bigger point can be made here than just speculating over the intelligence of the Left’s newest darling.

Krugman’s main thesis on the role of government can be condensed down to a rather simple statement: government exists primarily to maximize societal welfare and reduce inequalities, taxing those better off than others to a certain high point, where doing any more would be counterproductive. That isn’t to say that those being taxed aren’t losing up until that point and are quite happy with their situation, but rather, it is past that “optimal rate” that their losses start to outweigh the marginal gains of wealth redistribution.

This is an essential clarification: the optimal rate that he speaks of is optimal not for, say, economic growth, productivity, or innovation, but specifically for the purpose of maximizing welfare; optimal for the creation of stagnating safety nets, not that which propels our economy—and the living standards of those who work in it—forward.

Did our Founders open the preamble of the Declaration of Independence with a proclamation that government exists to secure “life, liberty, and the pursuit of maximum wealth distribution?” Of course not. If the pursuit of happiness is to be realized, then government must serve to empower the creation of the novel ideas and purposes that make that goal possible, and not stand in the way. In essence, this taxation falls beneath the latter—the government is removing the incentive for Americans to work under the self-given role as the picker of economic winners and losers. While it may very well be the case that a 70% marginal income tax rate works best for redistribution, it clearly does not do the same for improving the economy overall.

It is also important to note that Krugman’s “optimal rate” is still very much a theory, not economic consensus, with an active debate still raging on today. Economist John Cochrane points this out on The Grumpy Economist, as well as the fact that Krugman’s cited paper by Diamond and Saez says itself that their marginal rate was for the total tax burden; AOC’s was only for income tax.

To illustrate just how big of a difference this is, Economist Gregory Mankiw calculated his total marginal tax rate to already be 90%. This means that out of every additional dollar he could potentially make doing additional economic research, he would only be able take home 10 cents for the benefit of his children. You don’t have to be a wealthy Harvard professor to observe the effect that such taxation would have on one’s incentive to work and create; what would your response be if your boss asked you whether or not you would like to work on an exciting new project, with a slightly less exciting pay cut of 90%? Now, imagine just how much worse that effect would be if it were buttressed by a significantly higher income tax.

John Cochrane cites a paper by Stanford economist Chad Jones in his above-linked blog, who comes to interesting conclusions when modeling such taxation-dissuasion scenarios. He found that when it comes to the generation of ideas—“the ultimate source of economic growth”—the high marginal taxes that AOC and Krugman support end up being disastrous. So disastrous, in fact, that the loss in innovation actually ends up harming societal welfare as well; it would appear to be that instead of being a tradeoff, the Green New Deal is entirely a lose-lose.

It gets even worse, of course. We all know that the only thing that a government can do with a budget is go over it, so it is more than safe to say that funding this general proposal would require even more money than what she conjectured. This isn’t just partisanship talking here—a mere look at the Congresswoman’s desired outcomes “within the target window of 10 years” proves just how costly her plan will be. Take, for example, the third goal of “upgrading every residential and industrial building for state-of-the-art energy efficiency, comfort and safety.” You would think that a Bronx native would understand just how many buildings that really is, with New York City alone being home to over a million.

With this in mind, there is no possible way that such a rate would be enough to fund her plan. Keep in mind that she considered it to be necessary for funding the Green New Deal alone; imagine the mental and financial gymnastics needed to convince your populist base that they won’t end up footing the bill for pipe dreams like Medicare for All.

Before us lies the Jurassic Park of politics: our economists and politicians were so preoccupied with whether or not they could raise our taxes, they didn’t stop to think if they should.


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