This weekend, “60 Minutes” aired an interview with the self-described “radical” rookie Democratic Congresswoman Alexandria Ocasio-Cortez. In it she proposed hiking the top marginal tax rate to fund green energy investment.
As she explained:
“You look at our tax rates back in the ’60s and when you have a progressive tax rate system, your tax rate, you know, let’s say, from zero to $75,000 may be 10 percent or 15 percent, et cetera. But once you get to, like, the tippy tops, on your 10 millionth dollar, sometimes you see tax rates as high as 60 or 70 percent. That doesn’t mean all $10 million are taxed at an extremely high rate, but it means that as you climb up this ladder you should be contributing more.”
Republican Congressman Steve Scalise quickly took to Twitter to register his objection: “Republicans: Let Americans keep more of their own hard-earned money. Democrats: Take away 70% of your income and give it to leftist fantasy programs.”
Ocasio-Cortez tweeted back: “You’re the GOP Minority Whip. How do you not know how marginal tax rates work?”
Clearly, she was trying to diss Scalise. But she was also trying to clear up a misconception shared by many Americans, as I know personally from years in classrooms and public events: the difference between the top marginal rate and a person’s total tax rate.
In the U.S. for 2018, here are the seven marginal rates:
Suppose you are half of a married couple filing taxes jointly; the two of you report your combined incomes, that is. Further suppose, God willing, that you earned $610,000 last year, after all exemptions and deductions. In that case, you will be in the top marginal tax bracket of 37 percent: the bottom line above. But that does not mean your income is being taxed at 37 percent. By the same logic, it would not be taxed at 70 percent if that were the marginal rate, as Scalise incorrectly suggested.
In fact, for those who like arithmetic or just want to understand the simple math behind their own earned income tax bill, the total IRS tab on a $610,000 joint income would be the following:
$1,905 (10 percent of $19,050)
+$7,002 (12 percent of the next $58,350 you earned)
+$19,272 (22 percent of the next $87,600 you earned)
+$36,000 (24 percent of the next $150,000)
+$27,200 (32 percent of the next $85,000)
+$70,000 (35 percent of the next $200,000)
+$3,700 (37 percent of everything earned above $600,000)
= a total IRS bill of $165,079
Remember that I’ve given you an earned income, adjusted for exemptions and deductions, of $610,000, So what percentage does your tax bite of $165,079 represent? You don’t even need a calculator for this, but I’ll use one anyway. The answer: about 27 percent.
You get the distinction, right? Your top marginal rate is 37 percent. But you’re only paying 27 percent in taxes because it’s a “progressive” tax system. As you make more, your tax rate progresses into tax “brackets” where the rate on your marginal income — the income above that margin — gets higher.
A brief history of marginal tax rates
There was another provocative weekend tweet on the subject. Self-described “black activist” Samuel Sinyangwe tweeted: “It’s interesting how the #MAGA crowd is so opposed to the 70% top income tax rate and 77% estate tax rate that were in place during the same time period they claim they want America to return to.”
That is, if Trump supporters want to return to the 1940s, ’50s and early ’60s, the top income tax rates were the highest in U.S. history and remained above 70 percent through the ’70s. If they want to go back to the Reagan era of the ’80s, however, the top rates were among the lowest.
A few years ago, we looked at the history of the top marginal rate in America. Here are some highlights.
1913: A permanent income tax was first adopted with the top tax rate at 7 percent. But only the rich were taxed at all. You didn’t pay any tax until your total earnings, from all sources, were more than $400,000 in today’s dollars, using the most conservative adjustment for inflation. (The highest adjustment would mean the income tax only kicked in at $11 million in today’s dollars.)
1916-1918: To pay for World War I, Congress passed a law that dramatically increased the highest tax rate to 77 percent. The rise was referred to, as “soaking the rich.”
1920s: Republican Treasury Secretary Andrew Mellon slashed the top rate to 25 percent. Tax cut proponents like Arthur Laffer point to the boom of “the Roarin’ Twenties” as evidence tax cuts work, and argued that high marginal rates on the rich mainly lead to tax avoidance schemes.
Tax cut opponents, by contrast, say the cuts helped lead to the financial mania that precipitated the Crash of 1929 and also helped trigger the Great Depression. For these reasons, they argue, tax avoidance should be clamped down on.
1932: With federal income sinking because of a shrinking economy, Republican President Herbert Hoover introduced a temporary but sharp tax increase with a top marginal rate of 63 percent. Democratic President Franklin Delano Roosevelt eventually raised the rate to 94 percent to help pay for World War II, though the top margin only kicked in at $200,000, equivalent to more than $2.2 million in today’s dollars. But even after the war ended, the top marginal tax rate remained above 90 percent through 1960, when a married couple earning above about $2.5 million in today’s dollars paid a marginal rate of 91 percent on everything above that.
The ’80s and Reagan’s cuts: President Ronald Reagan signed two tax cuts. One, in 1981, brought the top tax rate down to 50 percent for all income above about $250,000 in today’s dollars.Another, r in 1986, dropped the top marginal rate to 28 percent for anyone earning more than $60,000 or so in today’s dollars.
Clinton-era taxes: Under President Bill Clinton, the highest tax tier increased to near 40 percent, and it has fluctuated around that level ever since.
The bottom line
So does a low marginal rate stimulate the economy or do high rates stifle it? Politico has a nice article showing the relationship between sharp changes in the top marginal rate and economic growth.
Finally, here’s a juicy story we did on the debate with tax cut champion Arthur Laffer, Nobel laureate Peter Diamond, and economic journalist and tax expert David Cay Johnston.
An earlier version of this story indicated the top tax bracket in 1913 was 6 percent. The top bracket was, in fact, 7 percent.