Bernie Sander’s Tax Plan Would Test An Economic Hypothesis | The New York Times | 02.09.2016
One of the ideas Mr. Sanders has advanced is more revolutionary than it looks at first glance: much higher taxes on the highest earners, so high they would reach or even pass the point after which higher tax rates mean less revenue instead of more.
Mr. Sanders has proposed a headline top tax rate of 52 percent, applying only to incomes over $10 million. But that’s just the federal income tax.
When you combine it with other taxes that apply to income, like existing payroll taxes and new ones Mr. Sanders would impose to pay for Social Security, single-payer health care and family leave, and then add those on top of taxes levied by state governments, it would add up to a combined tax rate of over 73 percent on the highest incomes, more than 20 points higher than today. That’s in the average state — maximum rates in high-tax jurisdictions like California and New York City would be even higher.
Mr. Sanders’s 73 percent rate would apply only to ordinary income and only to people making over $10 million a year, which is not very many people. But even for what you might call garden-variety rich people, Mr. Sanders’s plan would push rates near the revenue maximizing level: His plan would result in an all-in tax rate of just over 65 percent on income between $500,000 and $2 million.
But there are two reasons to worry about revenues in the context of Mr. Sanders’s plan. The first is that 73 percent is a lot more than 42.5 percent, and so Mr. Sanders cannot rely on a wide cushion around the estimate of the revenue-maximizing tax rate to be assured that he is below it.
The other is that the relationship between tax rates and revenue collected is a curve. As you climb to the top of the curve, revenues keep going up, but they rise more and more slowly. When you are very near the revenue-maximizing rate, every dollar of new revenue generated through higher tax rates is offset by almost one dollar of lost revenue because of lower reported incomes.
It is a good thing that Mr. Sanders’s plan does not rely mostly on these high-earner taxes. More than 80 percent of his proposed tax increases to pay for his health plan come from broad-based income and payroll taxes that would apply to nearly all workers. In contrast with very high rates at the top, there is no question that these taxes could generate additional revenue to fund government programs — and could even be set higher if there were a revenue shortfall.
