Proposals to raise taxes from the rich have shouldered their way to the front-and-center of policy debates. It’s about time. Recent decades have seen an enormous increase in inequality. From 1979 to 2015, the top 1 percent saw pre-tax income growth 275 percent faster than growth for the median household. Over this same period, changes in the tax code didn’t provide any buffer against this rise in pre-tax inequality, and the tax cuts of 2017 clearly made it worse.
Higher top marginal tax rates — an idea recently championed by Rep. Alexandria Ocasio-Cortez, D-N.Y. — could help equalize this pre-tax income growth by reducing the incentives of the privileged to rig the rules of the economy to send money their way.
For example, CEOs likely see every dollar that a firm’s workers get as a dollar not available for top managers to pocket. When marginal tax rates are low and CEOs can take home most of every last dollar they manage to pocket, the incentive is higher to deny their workers raises — even if this sparks public outrage or some other cost to management.
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In the three decades following World War II, high top marginal tax rates likely contributed to the low pre-tax inequality that prevailed, and the economy grew far faster than it has since the 1980s, when top tax rates were slashed.
Of course, the effort to raise taxes from the rich shouldn’t rely solely on raising top rates. It should also include equalizing the taxes paid on income from work and wealth, closing loopholes that shield wealthy households’ incomes from taxation, and robust enforcement efforts.
Finally, even if raising taxes from the rich doesn’t manage to compress pre-tax income growth, it will still finance help for low- and moderate-income households through spending on social insurance, the safety net and work supports, and public investments.
Higher taxes on the rich won’t be sufficient to ensure a fairer and more efficient economy, but they’re definitely necessary.
Josh Bivens is director of research at the Economic Policy Institute.
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