February 13, 2019
Special Guest Perspective by Dan O’Donnell
It was the moment dreams are made of: Bob, a bingo player from Mukwonago, stood before a prize wheel at Potawatomi Hotel and Casino in Milwaukee with a chance to win a million dollars. As the wheel slowed, the crowd roared in anticipation. It ticked past $250,000, inched past $100,000, and then, finally stopped on the number that would change Bob’s life forever.
The crowd exploded and Bob raised his hands in equal parts excitement and disbelief. He had just won $1 million…almost.
As everyone who has ever won a major prize either at a casino or through a state lottery knows, after taxes Bob’s winnings will be much closer to half a million dollars than the full million.
And if Democratic Socialists like Alexandria Ocasio-Cortez and Elizabeth Warren get their way, it could be far less than that.
“Millionaires and billionaires” have been the boogeymen of the modern Democratic Party for years, but over the past 12 months, the Party has lurched even farther to the left with renewed calls for marginal tax rates as high as 70-90% on the wealthiest Americans.
“This is not a new idea,” Ocasio-Cortez told “The Late Show’s” Stephen Colbert. “People are yelling, ‘She’s a socialist, she wants 70% marginal tax rates.’ Under Republican administration, Dwight Eisenhower, we had 90% marginal tax rates.”
That’s precisely the level to which Warren intimated she would like top rates to return during an interview with CNBC.
“Look, there was a time in a very prosperous America—an America that was growing a middle class, an America in which working families were doing better generation after generation after generation—where the top marginal rate was well above 50 percent,” she said. “90% sounds pretty shockingly high. But what I’m trying to get at is this is not about negotiating over specific numbers.”
Of course, neither Warren nor Ocasio-Cortez nor any other Democrat proposing what amount to confiscatory tax rates want to discuss specific numbers, because they reveal just how much actual money the government would take from each paycheck.
In the 2018/2019 fiscal year, an individual income tax filer earning more than $500,000 would see his or her first $9,525 of taxable income subject to a 10% rate. Every dollar earned after that would then be taxed at 12% up to $38,700, at 22% up to $82,500, 24% up to $157,500, 32% up to $200,000, 35% up to $500,000, and 37% on each dollar earned after the first $500,000.
Not accounting for any deductions or state taxes, someone who makes $1 million in a given year would pay roughly $335,000 just in federal taxes. $1 million in earnings is only $665,000 in take-home pay.
Using Bob, Wisconsin’s newest millionaire, as an example is thus illustrative. For the sake of arguments, let’s say he earned $1 million and didn’t win it (since gambling winnings are taxed differently than earned income). Instead of winning $1 million at Potawatomi Hotel and Casino, let’s say he is the CEO of Potawatomi Hotel and Casino. Instead of getting lucky at the casino, let’s say he dedicated his life to working for the casino and after decades of loyal service was rewarded with a major compensation package.
Now, for the sake of arguments, let’s say his million dollar salary was subject to a top tax rate of 70% instead of the current top rate of 37%. His first $500,000 would incur a total of $150,000 in federal taxes, but his second $500,000 would get hit with a whopping $350,000. He would only take home $150,000 of the half a million he earned. Instead of taking home $665,000 of his million dollar salary, he would only receive $500,000.
If the top marginal tax rate was 90%, he would only be allowed to keep $50,000 of his second half-million: The federal government would take $450,000! His total take-home pay on a million-dollar salary would be just $400,000.
Naturally, supporters of such high marginal tax rates will balk at this analysis, claiming that the 70% and 90% rates would affect only those who make $10 million or more, not $1 million or more, but this ignores a painful reality: Eventually, as Margaret Thatcher famously said, the federal government will run out of the super-rich’s money.
And it would happen a lot sooner than the Democratic Socialists are letting on. Even if the government were to seize every cent from every one of America’s billionaires, government spending would be funded only for a matter of months. Ditto for taxing every cent of every dollar earned over $10 million. Heck, seizing every dollar earned over $1 million would be just a drop in the bucket of government spending at current levels. Imagine what those levels might be if Ocasio-Cortez’s Green New Deal were to ever become law.
Raising taxes on earnings under $1 million wouldn’t just be likely; it would be necessary. $1 million in salary might translate to only $400,000 in earnings. While that may sound like just desserts to the envious (and, really, who isn’t jealous of a guy who made a fortune spinning a prize wheel?), to the serious it is shockingly poor tax policy.
Confiscatory taxation disincentivizes achievement, which in turn disincentivizes innovation. The goal of a government is not and should not be to determine that everyone who earns a lot of money is essentially identical to someone who wins a lot of money and, because of that, needs to repay some sort of debt to society.
This is resentment politics at its most nauseous—fiscal policy premised more on the tempting desire to knock the successful down a few pegs than on the legitimate need to fund government at realistic levels.
In a system that demonizes success and punishes wealth, who wants to be a millionaire? Who wants that target on their back as government’s stated enemy?
And who would want to have to earn $10 million just to keep $1 million?