Today, Explained - Let's talk about tax, baby. Let's talk about AOC.

Episode Date: January 9, 2019

Congressmember Alexandria Ocasio-Cortez has floated a marginal tax rate of 70% for top earners in America. A lot of people are upset, and even more have no idea how it works. *********************************** Check out this easy video on how tax brackets work: https://youtu.be/VJhsjUPDulw Learn more about your ad choices. Visit podcastchoices.com/adchoices

Support for this Wednesday, January 9th, 2019 episode of Today Explained comes from Quip Electric Toothbrushes. More people than you'll find in the entire state of South Dakota use the Quip Electric Toothbrush. You can get started at getquip.com slash explained, g-e-t-q-u-i-p.com slash explained. The Quip starts at $25 and your first set of refills is free. The president was all over primetime TV last night. Why do wealthy politicians build walls, fences, and gates around their homes? They don't build walls because they hate the people on the outside, but because they love the people on the inside.

But his address was almost immediately overshadowed by Chuck and Nancy awkwardly sharing a podium during their rebuttal. Congressmember Alexandria Ocasio-Cortez was also on primetime TV this week. Tonight on 60 Minutes. And she said something that people still haven't stopped talking about. 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% or 15%, et cetera. But once you get to the tippy tops, on your $10 million, sometimes you see tax rates as high as 60% or 70%. 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. And cue the freak out in three, two, one. I strongly disagree with this idea that you should just confiscate all the money or most of the money that people make. If you want to find out how to tell people not to make a lot of money, you take 80% of what they make and tell them we're taking it all and they won't do it. So now she wants to confiscate what would be the equivalent if you lived in her state of New York of 85 cents of every dollar. Something must be done. War would mean a prohibitive increase in

our taxes. Hey, I got an uncle lives in Texas. No, I'm talking about taxes, money, dollars. It turns out a lot of people don't really understand how taxes work. They really don't. What became clear just looking around the comments and the way people were framing this idea was people really thought that it meant she wanted to tax everyone's income as 70%. So meaning if you're a school teacher and you earn $50,000 a year, she's going to take 70% of your income. But that's not what she meant at all. What she is saying is for people who earn $10 million, everything beyond that $10 million should be taxed at a higher rate. And her ballpark figure was 70%. Amy Peakey understands how taxes work.

She's a reporter for CBS Money Watch. Think of it right now when you pay your taxes, say you're someone who makes about $35,000 a year. Your first roughly $9,000 or $10,000 is taxed at 10%. And then it goes up to 12% from what you earn between like $9,000 and that $35,000 is taxed at 10%. And then it goes up to 12% from what you earn between like 9,000 and that 35,000. So the highest marginal tax rate is not what you actually pay on your entire income. You have to look at it when you average in all the different rates you're paying on each bit of income that you earn up to a certain amount. Okay, so literally everyone already is paying different income tax

on different levels of their income. That's right. Okay, now, just in case there's anyone out there who's still confused, we found this great example on Twitter that uses someone we all know, a celebrity, a wrestler, a future presidential candidate maybe. Can I play it for you? Yeah, please. Okay, so we got this person, Diana Anderson, to actually record herself reading her Twitter thread for us, and here it is. So say the Dems get their knickers untwisted and do the bold thing

and create a tax rate of 70% for all income above, say, 10 million. Let's say you're Dwayne The Rock Johnson. You made $65 million last year in one year, so that $10 million cutoff is going to hit you. 70% off everything above $10 million. That leaves you with $16.5 million. Wow, that's a big hit, you think. On paper, yeah, that's a lot of money to just give up in taxes. But that still leaves The Rock with nearly $20 million, considering his $10 million is also taxed at a low rate. Put it another way, The Rock would pay almost enough in taxes in a single year to completely solve Flint's water crisis. And that's just The Rock. Dwayne The Rock Johnson, wrestler-come-action star, 260 pounds of pure ass-kicking muscle that knows how to say beat down in 32 languages. Imagine what would happen if we were able to tax

all billionaires and people above $10 million yearly at that rate. We could fund hospitals. We could fund libraries. We could fix broken infrastructure. We could implement so many programs to ensure children don't go hungry. And yet, somehow we don't. So does she have it right? Yeah, she does. That's great. That's a great Twitter stream.

And I love The Rock, and it's a great example. But would The Rock love her after saying that? I don't know. I have a feeling he might, actually. He seems like someone who would be behind investing more money into public education and other things like that. And I think that's right on. It's just that Republicans are coming out kind of framing it as, you know, the crazy left wants to take 70% of your income, but that's not the case. It's, you know, these higher rates above this threshold. And it's what we have in the system right now.

It's just that the highest rates are much lower. I think the highest tax rate right now is 37%. And who does that 37% affect? Who's that for? People making over what? Yeah, single filers who make over $500,000. So what do we know about how high tax rates work with the economy? Do they help it?

Do they hurt it? Do they slow it down? Do they make it boom? What happens? When tax rates were at their highest, the economy was actually growing faster than it is now. And so, you know, is it going to ruin the economy? Just looking in our past, no, it won't. What about American popular opinion?

I mean, what kind of support does like the trickle-down, you know, tax cuts for the rich have? And what kind of support does, say, tax the rich have? Yeah, so the trickle-down theory was introduced in the 1980s. That was when Ronald Reagan cut tax rates and kind of reformed the tax system with the idea that if the rich had more money, they would invest that money in the economy, create jobs. And there's actually no proof that that actually works, but that's the theory that was fueling Donald Trump's tax cuts in 2017.

In terms of how people feel about it, most Americans believe that the wealthy aren't paying their fair share in taxes. There was an April 2018 Gallup survey that said 62% of respondents believe the wealthy don't pay their fair share. The tax cut bill from 2017 also is not very popular with most people. I think there have been polls as well that find that most people feel that it's benefiting the wealthy over the middle class. And that does bother people. How much money would a higher tax rate on the richest Americans like the one that Alexandria Ocasio-Cortez is proposing raise? Well, the Washington Post did a back of the envelope calculation, and they estimate that it would raise about $72 billion a year. Over 10 years, it would pay for half the

outstanding student debt. It would fund each year a universal pre-K system in the U.S. It's about as much money as the food stamp program costs. So, I mean, if you think of it in those terms, you could do a lot of good with that money. Is there any chance in the near distant future that something like this could actually pass? I can't predict political outcomes, but I will say that economists generally believe that there should be higher marginal tax rates. So the research is there. You know, in terms of financially, does this make sense for the economy? I think people would say yes, you know, it does.

I mean, it basically is the system we have now. It's just, you know, should we go back to what we had in the 50s and 60s when the economy was growing at a much faster rate? Well, yeah, I mean, I think people might be more willing to consider that in the future. Up next, the very first income taxes we ever had were exclusively on the rich. Guess who imposed them? I'll give you one hint. He's on Mount Rushmore. I'm Sean Ramos-Viram.

This is Today Explained. You got any New Year's resolutions? One of mine is to finally finish Moby Dick. I'm like 45 pages in on my 80th run, and Melville's throwing the word savage around a lot. It's making me a little nervous, but I think it's going to come around. Another thing you can do is take care of your mouth real well. The Quip electric toothbrush might be able to help. It's one of the first electric toothbrushes

accepted by the American Dental Association with thousands of verified five-star reviews. It's got these sensitive sonic vibrations for an effective clean that's gentle on your sensitive gums. There's also this gentle little pulse that tells you when to switch quadrants where you're brushing.

Over a million people use the Quip and it starts at just $25 with your first set of refills coming in for free There's also this gentle little pulse that tells you when to switch quadrants where you're brushing. Over a million people use the Quip and it starts at just $25 with your first set of refills coming in for free at getquip.com slash explained. G-E-T-Q-U-I-P dot com slash explained. Steve Weissman loves taxes. It's a subject dear to my heart. Mine too. My parents are accountants. Oh. He wrote about them for the New York Times for a few decades.

After that, he published a book about them. It's called The Great Tax Wars, from Lincoln, Teddy Roosevelt, and Woodrow Wilson, How the Income Tax Transformed America. And why do you start with Lincoln? Is it because income taxes started with Lincoln? That's correct. It's very little appreciated that Abraham Lincoln, the father of so much in our country and the great emancipator,

is also the father of the income tax. But yes, the income tax was first introduced in the United States during the Civil War to help support the cost of the war and not run up such huge deficits that inflation would completely destroy the finances of the Union. So who exactly was taxed? Only the very rich. It was a tax that was probably not paid by more than 3% to 5% of the earners in the United States. And the top rate at the height of the war was only about 10%. And in the years after the Civil War, in the late 1860s and into the 1870s, it was in stages, it was rescinded and repealed. So the idea here was that wars cost money. Everyone should have

to sacrifice something, if not your life, then your money. War is always the impetus for raising taxes. That is especially true during World War I, when the top tax rate went up to something like 70%. 70%. And of course, during World War II, the tax rate went up to 90%. 90%. You only paid that rate on the additional income. It was a graduated rate, just as we have today. Right.

The top rate is only on the last dollar that you earn. But on the last dollar that you earned, if you were very wealthy, the tax rate was virtually in the confiscatory range of 90%. It is not a sacrifice for the industrialist or the wage earner, the farmer or the shopkeeper, the train man or the doctor, to pay more taxes, to buy more bonds, to forgo extra profits.

Rather, is it big privilege. When exactly do we see the trend start going in the other direction? Is that after World War II? Yes. Ironically, it was a Democrat, President Kennedy, who introduced the idea of cutting taxes to stimulate the economy. This was almost a revolutionary idea. It was a Keynesian idea.

Such a bill will be presented to the Congress for action next year. It will include an across-the-board, top-to-bottom cut in both corporate and personal income taxes. It will include long-needed tax reforms that logic and equity demand. And it will date that cut in taxes to take effect as of the start of next year, January 1963. And Republicans, hard as it would be to believe, resisted Kennedy on that because they cared more about the federal deficit. They continued to be cut through the 1960s, but it really wasn't until the advent of Ronald Reagan in 1980 that the income tax rates were reduced dramatically to the range of where they are today.

When I sign this bill into law, America will have the lowest marginal tax rates and the most modern tax code among major industrialized nations, one that encourages risk-taking, innovation, and that old American spirit of enterprise. And at that point, is it tax cuts across the board or is it tax cuts for the rich? The top rates were lowered significantly, but in order to get full congressional support, they also involved steep tax cuts for the middle class and for the poor. years ago when Mitt Romney ran for president against Barack Obama, he complained that only 47% of Americans actually pay income taxes. And he was right about that. The bottom half of Americans don't pay federal income tax. And then there's also something called the earned income tax credit, which is actually a rebate to the very poor in return for the social security taxes that they pay. So the tax cuts on the very rich have always been accompanied by at least some tax cuts on the middle class to make them politically palatable.

You cannot sell a tax cut just by saying, oh, let's give a break to the rich. In fact, if you look at the public reaction to the Trump and Republican congressional tax cuts of late 2017, which were enacted at the end of Trump's first year in office, those tax cuts weren't especially popular because they were seen by the public as heavily skewed toward both the rich and to corporations. In fact, they were skewed. So people are savvy enough about tax cuts to know when they're getting a good deal or not.

Does that check out historically? I think it does. Now we're in a debate, which is that what is the rate where a tax increase becomes counterproductive? Most economists would agree that there is at some point a threshold where if you raise taxes too much, it actually hurts the economy. The disagreement is over what that rate is. Do we have any idea? We do not.

The consensus among Democratic economists probably is that the top rate could go much higher than it is now, which is in the upper 30s, up to maybe the 50s or 60s. But, of course, the Republicans say, no, we are pretty much at that rate now in the upper 30s. Anything higher than that is going to disincentivize people to work hard and invest and save and help the economy. You mentioned Democratic economists and Republican economists. Is that a thing? Do we not have people who are just trying to figure out how the economy functions without infusing partisan ideology? That's a really good question. You sound like Chief Justice Roberts. You know, there are no Democratic judges. Call the balls and strikes. We just call balls and strikes. You know, economics is the study of trade-offs. The most famous trade-off

is guns versus butter. You know, if you spend money on defense, there's going to be less money available for social programs and domestic uses. Economists invariably, because of their biases, they analyze the trade-offs in terms of their own preferences. You know, everyone in this country seems to associate tax cuts with Republican leaders and tax hikes with Democratic leaders. But you mentioned that one of the biggest tax cuts came from John F. Kennedy. He was the first one to get out there and say, let's cut taxes to stimulate the economy. How is it that one party seemed to become the party of tax cuts and the other became the party of tax hikes?

I think because of Reagan. In the 1970s, income taxes or taxes, for the first time in a long time, and maybe the first time ever, became central to American politics. I have my veto pen drawn and ready for any tax increase that Congress might even think of sending up. And I have only one thing to say to the tax increases. Go ahead, make my day.

And do we have any idea how much the reduction of taxes for high earners over the course of, say, the Reagan presidency, the George W. Bush presidency, now the Donald Trump presidency, has exacerbated the income inequality in the United States? Yes, we do. show that every time a tax cut is enacted in a regressive way where the rates, the distribution of the benefits of the tax cut are skewed to the rich, yes, clearly that aggravates the problem of economic inequality. As someone who's spent a lot of time looking at the long history of taxes in this country. Do you think a 70% marginal tax increase for the highest earners could reframe the way Americans think about taxes in this current generation? I think it's starting to generate a useful debate. A few years ago, the French economist Thomas Piketty wrote a very important book called Capital, which proposed an 80% tax rate. I personally don't think that a marginal rate of 70% is very likely to fly politically in this country, but I think it's a useful debate to have

because inequality is also an urgent concern for Americans increasingly. And it is useful to know that there have been times in American history where the marginal tax rate was that high. The argument in favor of raising taxes is always based on argument that has to do with personal liberty that is very central to our country. And if I could show that the arguments that we're waging today are not that new, I think we can better understand how we can achieve compromises and resolution of these conflicts in the future. Steve Weissman is a former New York Times reporter and the author of The Great Tax Wars, Lincoln to Wilson,

the fierce battles over money and power that transformed the nation. Thanks again to Quip Electric Toothbrushes for supporting the show today. You can go to getquip.com slash explained and find out why over a million people use the Quip. It starts at just $25 and your first set of refills is free. G-E-T-Q-U-I-P dot com slash explained.