A 70% Tax On The Rich Won’t Work For This One Simple Reason
Alexandria Ocasio-Cortez has ruffled feathers yet again in Washington with her idea of a 70% tax rate on the rich. Depending on what side of the fence you stand on this may seem like the right or wrong thing to do. I’m not here to tell you which side on the fence you should be on. Rather, to tell you that no matter what the tax rate is it won’t matter.
Before I get into that I want to get into some history of the tax system. When people under 30 hear of a 70% income tax they instantly freak out. How could our government take that much of our hard earned money? Well, they’ve already done it in the past and at a much higher rate.
An Overly Simplified Tax History Lesson
From 1916-1918 the top marginal tax rate jumped from 15% to 77%. This was fueled by the government needing funding for WWI. During the mid-1920s the tax rate eventually dropped back down just in time for WWII to start. Again, we see a massive jump this time over 80% where it stayed for 22 years (1940-1962). With the top tier tax rate peaking at 94% in 1944.
While these numbers may seem terrifying you must remember this was only for the top earners. Forget the 1% this is .001%, On top of that this was only for their income earned above that top tax rate bracket. Alexandria is proposing to make that threshold be $10 million.
If you aren’t familiar with how our tax bracketing system works it goes something like this:
You see, we aren’t taxed at one specific rate. Your first $9,700 of taxable income is only taxed at 10%. The next $30,000, 12% ($39,475 – $9,700) and so on. What she is proposing is just adding another rate of 70% for everything above $10 million. Doesn’t seem so crazy now does it?
Why It Won’t Work
The fact of the matter is it won’t ever work unless there is some major reconstruction of our tax system overall. In 2017 Donald Trump enacted new tax laws that seemed to be a huge overhaul for everyone. The largest two features being the cut to corporate tax rates and doubling the standard deduction. Republicans preached how you would be able to file your taxes on the back on a postcard. I must not buy my postcards in the same place they do.
What does this have to do with Cortez’s 70% tax not working? Well, it’s simple, or in the case of the tax code, it isn’t simple. You see, the US Federal tax code is over 2,500 pages long and when you add in all the notes and other junk it jumps up to over 70,000 pages long. That’s just the federal level, when you add in state laws it gets even messier. What it amounts to is a whole lot of legal jargon that you and I don’t want to read. Neither do the .001% that’s why they pay people to do it.
It’s undienalbe that the ultra rich are smart. Yes, I know there are some trust fund babies and other really dumb people that have just gotten lucky. But for the most part, they are intelligent people. We’re talking about Buffet, Zuckerberg, and the other 2000+ billionaires in the world. These people have teams made up of lawyers, accountants, and PR reps. Let’s just focus on the accountants though.
The one and only job of these accountants is to find ways to get rich peoples taxable income down. That’s it. They know the tax code front and back and already have an idea of what they can do to get the most bang for their client’s buck. Or in this case the lowest tax rate possible.
They do this by using loopholes in the tax code. I really hate the word loophole because it makes you think that what they’re doing is illegal when in fact it is perfectly legal. Now, whether you think it’s right or not is up to you but they are following the rules. Unfortunately, for you and I, we don’t know most of these rules. We’re just used to getting our W-2 at the end of the year and going about our business.
What most people don’t understand is that someone could have an income of $100 million and have $0 in taxable income. All by understanding the rules.
I don’t want to dive too deep into tax law because that would put most of you to sleep. Just understand there are hundreds of loopholes. One of my favorites is when someone starts a foundation. You could name a random wealthy person and chances are they have a foundation. This isn’t because they are incredibly charitable, even though some definitely are, instead it’s a tax loophole. Check out this New York Times article to learn more about that.
What About The Past?
At the beginning of this article, I told you how they raised taxes over 90% in the past. What happened then? Did the economy get a huge boost? Did the government make some amazing changes? Well here’s a chart that says it all:
This chart is pretty cut and dry and tells a surprising story. If anything major did happen it wasn’t correlated directly to tax income. How can we go from a top tier of 15% to over 90% and see no difference? Well, this is going to be due to a combination of things. The major one being that people find legal ways around paying tax just like today.
Wrapping It Up
Personally, I’m not a fan of taxes at all. I understand we need to fund certain initiatives at a federal level but I just don’t trust our current government to do it. We have a national debt that seems to be growing exponentially (over $22 trillion now) and a budget that can’t ever seem to get balanced. Add in political parties that would rather fight each other
While Cortez’s idea on a 70% tax rate may seem radical when we look back at our past it really isn’t. What is more concerning is that we are all focused on this huge income tax that most likely will never affect us even if it was enacted. All of our attention is drawn to it while our current tax code gets longer and more complicated.
What I hope you take away from this article is that you need to learn a little more about our tax laws. I understand numbers may not be your thing and I know it can be boring. But when you can keep thousands of dollars a year in your pocket and do it all legally why wouldn’t you?
The excuse that you are too young or don’t make enough doesn’t get you out of this one either. I take advantage of a ton of credits and write-offs every year that people have labeled for only the rich. Educate yourself and take advantage of these loopholes while they are still there.