What will it mean if the billionaires win the tax rate debate?

The recent proposal by Alexandria Ocasio-Cortez to raise the top marginal tax rate is generating lots of discussion. For the most part, debate centers on two questions about the proposal: is it a good idea, and if it is, could it get enacted? The first question, the economics of the issue, is certainly of top importance, and it ought to affect the second question, the likelihood that a top rate hike could be enacted. But do we feel confident that Congress will legislate in support of policies that a majority of people want and economics may say will optimize benefit to our society?

We may have an opportunity to test that question in a close to ideal setting over the next months. Unless the economic consensus becomes clear that raising taxes on the rich would be harmful to the economy, the test of whether society will get what it wants in this case has arguably already begun.  For the sizable majority (70%) of people in this country already favor increasing taxes on the rich, including a majority (54%) of Republicans. Given that the people most opposed to such a change constitute less than 0.1% of the people in this country, and that they are the wealthiest portion of the electorate by definition, we could hardly have a better example with which to test Gilens’ and Page’s assertion that the average citizen only gets what they want from government when that is also what the rich want government to do. Their influential study found that “average citizens and mass-based interest groups have little or no independent influence [on U.S. government policy]”. In this case, the policy choice is between what 70% of Americans want, and what the wealthiest 0.1% want.

And there are plenty of reasons the economics may favor raising marginal taxes on the highest brackets. Top tax rates are near historic lows, economic growth has tended to be higher under higher top rates, and top economists have stated their support, some estimating the ideal top tax rate to be 73%. Corporate profits per GDP are at historically high levels, significant fractions of which can be attributed to the exertion of market power, asymmetric globalization, or the exploitation of environmental externalities. Each of these market distortions increases profits but reduces overall societal benefit (the sum of consumer, producer and worker benefit), potentially providing the best economic justification for increasing tax rates: high marginal taxes in the highest income brackets may remove much of the incentive to initiate such market distortions.

One way or another, we will see how this plays out in the next few months, and possibly into the 2020 election cycle. For other “test cases” to keep an eye on, check out this list comparing elite vs general public interest in various policies. As we watch the progress of these various policy proposals, let’s keep Gilens’ and Page’s question in mind: “Who governs? Who really rules?”


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