Why higher taxes on the wealthiest may not work

Rep. Alexandria Ocasio-Cortez (D-NY) recently proposed a 70% marginal tax rate on America’s wealthiest to help fund a “Green New Deal.” While some argue the plan would supply the US with millions of dollars to lower carbon emissions and eliminate fossil fuels, many are concerned that her proposal would have serious economic consequences for Americans.

In an earlier paper for Tax Notes, AEI economists Aparna Mathur, Sita Slavov, and Michael Strain suggest that many underestimate the negative consequences that can result from a high marginal income tax rate. They warn that people may change their behavior when tax rates increase:

• First and most obviously, they can work less….[A]s tax rates increase, the number of hours worked by a given individual would decrease and thus dampen the revenue effects from increased taxation.

• People can shift income into nontaxable forms, such as employer-sponsored health insurance and other untaxed fringe benefits.

• They can underreport income.

The full paper is available here: Should the Top Marginal Income Tax Rate Be 73 Percent?