In an interview with CNBC’s John Harwood, Sen. Bernie Sanders (I-VT), who is running for the Democratic presidential candidacy, said he could back a 90 percent top marginal tax rate.
Harwood brought up that some have likened efforts to combat income inequality to Nazi Germany. Sanders noted sarcastically, “When radical, socialist Dwight D. Eisenhower was president, I think the highest marginal tax rate was something like 90 percent.”
Harwood followed up by asking, “When you think about something like 90 percent, you don’t think that’s obviously too high?” to which Sanders replied, “No.”
He continued, “What I think is obscene…when you have the top one-tenth of one percent owning almost as much as the bottom 90.”
Sanders is right that the top marginal tax rate, that paid by the wealthiest Americans, was around 90 percent under Eisenhower — it was actually 92 percent in the 1950s. Today, the top marginal tax rate is 39.6 percent, although the richest 1 percent end up paying less than that on average and the average rate actually fell for many years.
But that’s not likely the case. Last year, economists found that the point at which the top tax rate is high enough to maximize government revenues but not so high that it discourages the rich from trying to earn more is quite high: about 95 percent for the 1 percent. History bears that out. Economists have pointed out that post-war American growth has been higher during periods with much higher top marginal tax rates and lower when tax rates were substantially lower. When the top rate was more than 90 percent in the 50s, economic growth averaged more than 4 percent a year. But recently when the top rate has been closer to 35 percent, growth has been less than 2 percent a year on average.
The point of higher tax rates isn’t just to penalize the rich, of course. They would need to serve a policy function. For Sanders, that’s combatting income inequality. “If you have seen a massive transfer of wealth from the middle class to the top tenth of one percent, you’ve got to transfer that back,” he told Harwood.
A 90 percent top tax rate could achieve that goal. The same economists who found that the rich can swallow a 95 percent rate also found that a 90 percent tax rate for the 1 percent could significantly reduce the Gini index, a measure of income inequality. It would also help lower wealth inequality. Meanwhile, everyone’s wellbeing would improve, rich and poor alike.
So far, many Republican presidential candidates have proposed a radically different approach: a flat tax. Sen. Ted Cruz (TX), Sen. Rand Paul (KY), and Ben Carson have all backed this idea. The details of each proposal differs, but the basic premise is an attempt to simplify the tax code by only having one rate that everyone pays, rather than the current system in which rates increase as income increases. An analysis of one flat tax plan put forward by Texas Gov. Rick Perry (R) found that it would raise taxes for those at the bottom of the income scale by between $102 and $462, while the tax bill for those making more than $1 million a year would decrease by about a half million dollars.
It would also lower government revenue by between $500 billion and $1 trillion a year. If a candidate wanted to maintain the current level of revenue, it would require taxing everyone, rich or poor, by at least 25 percent.