Should income tax rates climb to 70 percent?

Newly elected politicians sometimes bring fresh ideas to the table.  In the case of US Rep. Alexandria Ocasio-Cortez (D-NY), we have a stale idea recycled -- raising income tax rates to 70 percent.  The top federal marginal tax rate in the US used to be 90 percent in the 1950s and early 1960s and remained at 70 percent through the early 1980s.  Ocasio-Cortez is pushing for the 70 percent rate to kick in at personal income above $10 million and would use the funds to pay for a Green New Deal.

As always, you will find some economists in support (see this summary by Matthew Yglesias) and others who are highly critical (see this Bloomberg column by Tyler Cowen and John Cochrane's blog).  The supporters back their arguments up with theoretical frameworks containing curious assumptions.  One has to do with diminishing marginal utility: an extra thousand dollars for Warren Buffett does nothing for Warren but can be life-changing for a homeless person.  (But do you trust the federal government to make these calculations?  Maybe another Congress  in 2030 decides the 70% rate should kick in at $100,000?)  Other key assumptions: 100% tax compliance and near-zero labor supply elasticities.

Eventually all income tax rates are going to have to go up because (1) the US budget deficit is not in a sustainable position and (2) the required compromise will have to include revenue enhancement along with expenditure reduction.  Although a 70 percent rate might look initially attractive from a  revenue generation standpoint, people make choices about how they get paid (cash versus benefits), how many hours they work and what professions they enter.  I doubt NC State would have as many MBA students as it does now if the top tax rate were above 50 percent.