Ocasio-Cortez's tax idea is big and bold - but not that radical

Published on Tuesday, 8 January 2019 17:57
Written by Charles Lane

Rep. Alexandria Ocasio-Cortez, D-N.Y., has caused an uproar by proposing a 70 percent marginal tax rate on earnings above $10 million, the “tippy-top” of the income scale, as she puts it. Conservatives are crying confiscatory taxation, and progressives are rushing to Ocasio-Cortez’s defense.

Amid all the hubbub, no one is paying attention to a really dubious tax idea emanating from another New Yorker in the new Democratic House majority.

Thirty-year House veteran Nita Lowey, from the tony suburbs north of the Big Apple, is touting a bill to restore full federal deductibility of state and local taxes, the so-called SALT break, which President Donald Trump’s 2017 tax bill dramatically shrank.

That provision hit high-income residents of wealthy suburbs, who are more likely to own expensive houses with large property tax bills, to pay top state income tax rates and to itemize deductions on their federal returns.

Fifty-six percent of the benefits from reinstating the SALT break would go to the top 1 percent of households, those making $755,000 or more, according to the Tax Policy Center. It would also resurrect the nontransparent situation whereby residents of low-tax states cross-subsidized their counterparts in high-tax states.

What’s more, it would be contrary to the long-term trend, however fitful, toward efficiency in the individual income tax code that began with the landmark 1986 tax reform.

Formerly characterized by high marginal rates offset by deductions and loopholes, each justified by some legislator’s pet policy goal or another, the code now levies relatively low rates - 37 percent is the top - on a broad base of ordinary income.

Despite its many other flaws, the 2017 Trump tax bill at least took a step in the direction of further tax reform by reducing the value of both the SALT deduction and another notorious suburb subsidy, the mortgage interest deduction.

As long as those and other loopholes aren’t reinstated, Ocasio-Cortez’s 70 percent ultrahigh-earner tax would raise a lot of money - about $720 billion over the next decade, according to analysts surveyed by The Washington Post.

Two caveats apply, however. First, wealthy people would almost certainly find clever ways in the existing code to avoid the entire impact of Ocasio-Cortez’s tax.

Second, Ocasio-Cortez could raise as much or more money, and possibly effect even more sweeping social change, through an alternative policy: eliminating what’s left of the deductions for SALT, mortgage interest and everything else that still clutters the tax code.

Eliminating all tax deductions would raise $1.3 trillion over the next decade, according to the Congressional Budget Office, almost twice as much as her proposal would.

To be sure, this estimate is a bit artificial, based as it is on the CBO’s politically unrealistic assumption that the pre-Trump tax code will be restored after the 2017 bill’s individual tax provisions expire in 2025.

Still, the cumulative revenue increase between now and 2025 would be well above $500 billion, or about $72 billion per year, the same as Ocasio-Cortez’s proposal.

The move would be highly progressive, because more than 30 percent of individual tax deductions accrue to the top 1 percent on the income scale, and 80 percent go to the top fifth, according to the Congressional Budget Office.

There would be howls of protest from the relatively prosperous minority that still takes advantage of itemized tax deductions. Cries to protect the deduction for charitable donations would be especially loud, though a compromise proposal - limit the deduction to cash donations only, as opposed to, say, gifts of used clothing or shares of stock - could defuse some of that. The CBO says this would still raise $145.7 billion over 10 years.

The resistance to a zero-deductions plan would be directly proportional to its radicalism. Yes, soaking the 16,000 or so taxpayers who make more than $10 million per year would send a strong egalitarian signal - and raise a lot of revenue.

Beyond those wealthy few households, however, it would make little or no difference to the American social fabric.

Charles Lane is a Post editorial writer specializing in economic and fiscal policy, and a weekly columnist.



Posted in The Bristol Press, Editorials on Tuesday, 8 January 2019 17:57. Updated: Tuesday, 8 January 2019 18:00.