Alexandra Ocasio-Cortez and Elizabeth Warren have done a good job at provoking conservative outrage with their recent tax proposals. AOC, who has learned in a hurry how to get under conservatives' skin, has suggested the creation of a new 70% marginal tax rate on incomes above $10 million. Warren, in the meantime, has taken a more novel approach, suggesting the creation of a "wealth tax" of 2% on assets over $50 million, rising to 3% on assets of $1 billion or more.
Fox News host Mark Levin has led the charge from the right, railing against AOC as the harbinger of the rise of a Marxist state in America. “I have a question for Beto O’Dork,” Mark Levin ranted, persisting in the name-calling that clearly appeals to his listeners, but only degrades the prospect of serious political discourse. “I have a question for Alexandria Ocasio-Ocasio. I have a question for Bernie Sanders. I have a question for all of them. How will the ‘Democratic-Socialist Republic of America’ that you seek to create – how can you ensure us that it won’t turn into Venezuela?”
Warren has garnered less vitriol than AOC for her proposal. That may be because attacking AOC has quickly become a cause célèbre on the right, or it could be due to sticker shock. 70%, after all, is a high number. However, Warren's proposal is actually more unusual, as while marginal tax rates have been as high as 70% as recently as the 1970s, the federal government has never had a wealth tax.
It is worth noting that "wealth taxes" have long existed at the state level, even though we don't call them that. We call them property taxes, which are a staple of taxation at the state and local level. For a large majority of Americans, whose wealth is overwhelmingly concentrated in their primary residence, the property tax is effectively a wealth tax (though it should more accurately be called an "asset tax," as homes are taxed at their full value without regard to outstanding mortgages). "Personal property taxes" – applied in the same manner as real property taxes but applied against stocks, bonds and other assets – have been on the books in many states dating back to the 1800s. While many have been repealed, the notion of taxing individual wealth directly, as opposed to income, is not unheard of in our history.
A primary argument among economists against both of these tax proposals is that they disregard the history of tax avoidance – measures, illegal and legal, that people tend to take to avoid taxation when it is seen as confiscatory. While supporters of new taxes on the rich tend to describe them in terms of "fairness," fairness is ultimately in the eyes of the beholder. Real property taxes have remained in place at the local level while personal property taxes have been repealed, not because of a philosophical aversion to taxing wealth as much as due to the practical reality that personal property is easily relocated to jurisdictions – other states or off-shore tax havens – where taxes are lower or non-existent. Those who question the practicality of what AOC has proposed are quick to point to the history of marginal income tax rates at the federal level, which suggests that in practice higher rates have resulted in higher levels of tax avoidance rather than increased total tax collections. As illustrated in this graphic, while marginal tax rates were in the 70-90% range for much of the 20th century, those rates did not translate into higher revenues to the federal government as a percent of GDP.
The proposals put forth by AOC and Elizabeth Warren, however, are not fundamentally about tax efficiency, but rather in response to the widespread sentiment that "the system" is no longer working for the working and middle classes, as reflected in the graphic here that illustrates the steadily declining share of income in the United States flowing to middle income households since 1970. In 2016, the two presidential contenders that did the most to disrupt and transform their respective political parties – Donald Trump and Bernie Sanders – each ran on a message that the system was not working for average Americans. The data supporting the notion that the U.S. economic system has failed to deliver for working class and middle-class families was encapsulated during the 2016 election in the oft-cited observation that median real wages today remain below where they were 40 years ago. In his review of Adam Tooze's book about the societal impact of the 2008 financial collapse – Crashed: How a Decade of Financial Crises Changed the World – University of Chicago economic historian Jon Levy tied this argument to the parallel issue of income inequality, pointing out not just that incomes were flat in real terms for families in the lower half of the income distribution over the thirty-five year period from 1980 to 2014, but that during the same period incomes for the top 10% more than doubled, for the top 1% more than tripled, and for the top 0.001% – which is to say the top one thousand or so households – grew more than seven-fold.
Against that backdrop, the 2008 financial crisis and ensuing recession had a particularly devastating impact on the financial security of middle class families. According to data compiled by NYU economist Edward Wolff, median household wealth in the United States increased by 50% during the decades preceding the 2008 collapse, growing from $80,400 in 1983 to $118,600 in 2007, in real terms. By 2013, median household wealth had collapsed, falling to $65,800, suggesting that for a large share of American families more than thirty years of savings had been wiped out. To make matters worse, over the same time period, the percentage of American households with zero savings increased from 15.5% to 21.8%.
Over that same time period, the 60% of American families in the three middle income quintiles – those whose income lay between 20% and 80% of income distribution in the U.S. – saw their indebtedness increase and their financial flexibility decrease. Those families saw their indebtedness effectively double over the period from 1983 to 2013, with debt-to-net-worth ratios growing from 37.4% to 64.0% and debt-to-income ratios growing from 66.9% to 125.0%, respectively. This increase in household debt is a significant factor because for families – like corporations – a higher debt ratio leads to increased financial stress in the event of financial downturns. The problems attendant to increased household debt were exacerbated by reforms to federal bank statutes in 2005 that made it harder for families to deal with debt problems. Finally, even as families saw their aggregate net worth deteriorate over that thirty-year period, the share of household wealth held in cash or other liquid forms – as compared to home equity or pension accounts – declined from 21.4% to 8.1%, meaning that families were less able to deal with adversity when it arose.
Mark Levin may be right that "Americans Do Not Like Big, Authoritarian, Centralized Government," but he is missing the point. The Tea Party and Occupy movements were both animated by resentments toward Wall Street and the notion that the system is rigged, and those resentments were grounded in real evidence that the economic and political system has failed a large portion of Americans. AOC's proposal for a 70% tax rate might prove to be only marginally or even counter productive – either from the standpoint of revenue generation or addressing growing income inequality – but for many workers, and many voters, what matters is that she is feeling their pain.
When Mark Levin berates Democrats for ignoring the lessons of Venezuela, he might do well to consider the observation of his Fox News comrade-in-arms Tucker Carlson. For several months now, Carlson has raised the hackles of fellow conservatives for suggesting that the GOP is failing to come to terms with popular dissatisfaction with the status quo that has spread well beyond the Trump base. “Look what happened in Venezuela. People looked up one day and they’re like, ‘Wait a second, nine families control the whole economy but we still have the vote, and to punish them, we’re going to elect this guy, Hugo Chávez, and then Nicolás Maduro.'”
In a similar vein, concern that popular dissatisfaction is leading to a fraying of the global commitment to capitalism across the advanced democratic nations was widely voiced at the World Economic Forum this week. Writing from Davos, Katherine Bell, the editor of Barron's, reflected the anxiety among political, civic and business leaders in the face of growing populist movements on the left and the right. She bemoaned the rise of anti-trade, anti-globalization sentiments at a time when the global embrace of capitalism is widely credited with engendering previously unimaginable improvements in the quality of life across the globe, including lifting a billion people out of extreme poverty over the past three decades, cutting the percentage of the world population living in extreme poverty nearly in half, and reducing child mortality in low- and middle-income countries by 40%.
The notion that the system is broken at home is the flip side of a system that has produced the dramatic achievements across the world that Bell cited. The decline in global poverty has come about in large part as a product of the end of the Cold War, the global embrace of the world economic order championed by the United States, and the ensuing entry of hundreds of millions workers into interconnected global labor markets. Over the past half-century, the opening up of China and India, and the transformation of Southeast Asia, underpinned the globalization and outsourcing of jobs that in turn suppressed the incomes and unsettled the lives and livelihoods of workers at home.
The political tensions that gave us Donald Trump and Bernie Sanders, and now AOC and Elizabeth Warren, are tensions inherent in a world that is struggling to balance the moral, political and economic consequences of capitalism and democracy. Mark Levin and other conservatives – and now Michael Bloomberg and Howard Schultz have jumped on board – should take a deep breath before they continue down the well-worn path of name-calling and crying "Socialism!" at every proposal that comes down the road seeking to ameliorate popular discontent. Socialism is not a product of marginal tax rates, and the creation of a 70% rate would not make America a socialist country in 2020 any more than America was a socialist country during the Eisenhower years when top marginal tax rate was 90%. Instead, the rising appeal of socialism in public opinion polling should be seen – as Tucker Carlson aptly observed – as a result of a system that may be producing miracles abroad, but has produced a real sense of financial insecurity and instability for a large share of Americans at home. Those Americans vote, and rather than sloganeering and name-calling, politicians and pundits would be better served to take their concerns seriously.
Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit! To Save Our Democracy, It’s Time to Let Alabama Be Alabama and Set California Free."
Artwork by Joe Dworetzky. Check out Joe's political cartooning at www.jayduret.com. Follow him on Twitter @jayduret or Instagram at @joefaces.
Fox News host Mark Levin has led the charge from the right, railing against AOC as the harbinger of the rise of a Marxist state in America. “I have a question for Beto O’Dork,” Mark Levin ranted, persisting in the name-calling that clearly appeals to his listeners, but only degrades the prospect of serious political discourse. “I have a question for Alexandria Ocasio-Ocasio. I have a question for Bernie Sanders. I have a question for all of them. How will the ‘Democratic-Socialist Republic of America’ that you seek to create – how can you ensure us that it won’t turn into Venezuela?”
Warren has garnered less vitriol than AOC for her proposal. That may be because attacking AOC has quickly become a cause célèbre on the right, or it could be due to sticker shock. 70%, after all, is a high number. However, Warren's proposal is actually more unusual, as while marginal tax rates have been as high as 70% as recently as the 1970s, the federal government has never had a wealth tax.
It is worth noting that "wealth taxes" have long existed at the state level, even though we don't call them that. We call them property taxes, which are a staple of taxation at the state and local level. For a large majority of Americans, whose wealth is overwhelmingly concentrated in their primary residence, the property tax is effectively a wealth tax (though it should more accurately be called an "asset tax," as homes are taxed at their full value without regard to outstanding mortgages). "Personal property taxes" – applied in the same manner as real property taxes but applied against stocks, bonds and other assets – have been on the books in many states dating back to the 1800s. While many have been repealed, the notion of taxing individual wealth directly, as opposed to income, is not unheard of in our history.
The proposals put forth by AOC and Elizabeth Warren, however, are not fundamentally about tax efficiency, but rather in response to the widespread sentiment that "the system" is no longer working for the working and middle classes, as reflected in the graphic here that illustrates the steadily declining share of income in the United States flowing to middle income households since 1970. In 2016, the two presidential contenders that did the most to disrupt and transform their respective political parties – Donald Trump and Bernie Sanders – each ran on a message that the system was not working for average Americans. The data supporting the notion that the U.S. economic system has failed to deliver for working class and middle-class families was encapsulated during the 2016 election in the oft-cited observation that median real wages today remain below where they were 40 years ago. In his review of Adam Tooze's book about the societal impact of the 2008 financial collapse – Crashed: How a Decade of Financial Crises Changed the World – University of Chicago economic historian Jon Levy tied this argument to the parallel issue of income inequality, pointing out not just that incomes were flat in real terms for families in the lower half of the income distribution over the thirty-five year period from 1980 to 2014, but that during the same period incomes for the top 10% more than doubled, for the top 1% more than tripled, and for the top 0.001% – which is to say the top one thousand or so households – grew more than seven-fold.Over that same time period, the 60% of American families in the three middle income quintiles – those whose income lay between 20% and 80% of income distribution in the U.S. – saw their indebtedness increase and their financial flexibility decrease. Those families saw their indebtedness effectively double over the period from 1983 to 2013, with debt-to-net-worth ratios growing from 37.4% to 64.0% and debt-to-income ratios growing from 66.9% to 125.0%, respectively. This increase in household debt is a significant factor because for families – like corporations – a higher debt ratio leads to increased financial stress in the event of financial downturns. The problems attendant to increased household debt were exacerbated by reforms to federal bank statutes in 2005 that made it harder for families to deal with debt problems. Finally, even as families saw their aggregate net worth deteriorate over that thirty-year period, the share of household wealth held in cash or other liquid forms – as compared to home equity or pension accounts – declined from 21.4% to 8.1%, meaning that families were less able to deal with adversity when it arose.
When Mark Levin berates Democrats for ignoring the lessons of Venezuela, he might do well to consider the observation of his Fox News comrade-in-arms Tucker Carlson. For several months now, Carlson has raised the hackles of fellow conservatives for suggesting that the GOP is failing to come to terms with popular dissatisfaction with the status quo that has spread well beyond the Trump base. “Look what happened in Venezuela. People looked up one day and they’re like, ‘Wait a second, nine families control the whole economy but we still have the vote, and to punish them, we’re going to elect this guy, Hugo Chávez, and then Nicolás Maduro.'”
In a similar vein, concern that popular dissatisfaction is leading to a fraying of the global commitment to capitalism across the advanced democratic nations was widely voiced at the World Economic Forum this week. Writing from Davos, Katherine Bell, the editor of Barron's, reflected the anxiety among political, civic and business leaders in the face of growing populist movements on the left and the right. She bemoaned the rise of anti-trade, anti-globalization sentiments at a time when the global embrace of capitalism is widely credited with engendering previously unimaginable improvements in the quality of life across the globe, including lifting a billion people out of extreme poverty over the past three decades, cutting the percentage of the world population living in extreme poverty nearly in half, and reducing child mortality in low- and middle-income countries by 40%.
The notion that the system is broken at home is the flip side of a system that has produced the dramatic achievements across the world that Bell cited. The decline in global poverty has come about in large part as a product of the end of the Cold War, the global embrace of the world economic order championed by the United States, and the ensuing entry of hundreds of millions workers into interconnected global labor markets. Over the past half-century, the opening up of China and India, and the transformation of Southeast Asia, underpinned the globalization and outsourcing of jobs that in turn suppressed the incomes and unsettled the lives and livelihoods of workers at home.
The political tensions that gave us Donald Trump and Bernie Sanders, and now AOC and Elizabeth Warren, are tensions inherent in a world that is struggling to balance the moral, political and economic consequences of capitalism and democracy. Mark Levin and other conservatives – and now Michael Bloomberg and Howard Schultz have jumped on board – should take a deep breath before they continue down the well-worn path of name-calling and crying "Socialism!" at every proposal that comes down the road seeking to ameliorate popular discontent. Socialism is not a product of marginal tax rates, and the creation of a 70% rate would not make America a socialist country in 2020 any more than America was a socialist country during the Eisenhower years when top marginal tax rate was 90%. Instead, the rising appeal of socialism in public opinion polling should be seen – as Tucker Carlson aptly observed – as a result of a system that may be producing miracles abroad, but has produced a real sense of financial insecurity and instability for a large share of Americans at home. Those Americans vote, and rather than sloganeering and name-calling, politicians and pundits would be better served to take their concerns seriously.
Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit! To Save Our Democracy, It’s Time to Let Alabama Be Alabama and Set California Free."
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