Castro Endorses 70 Percent Income Tax Rate Despite Economic Concerns

Support for higher marginal tax rates cuts against recent economic history

• January 8, 2019 1:15 pm


Former secretary of Housing and Urban Development Julian Castro kicked off his yet-to-be-announced bid for the 2020 Democratic presidential nomination by endorsing a 70 percent top marginal income tax, despite longstanding concerns by economists over its viability.

Speaking to ABC's George Stephanopoulos over the weekend, Castro was asked if he supported a proposal by Democratic congresswoman Alexandria Ocasio-Cortez (N.Y.) to raise the marginal tax rate for individuals making more than $10 million from 37 percent to 70 percent in order to pay for new government programs—Medicare for All, a Green New Deal, and free college tuition, among others.

"Oh, I can support folks at the top paying their fair share," Castro told Stephanopoulos. "[T]here was a time in this country where the top marginal tax rate was over 90 percent, even during Reagan's era in the 1980s it was around 50 percent. So do I support [that] in order to have something like Medicare for All…. Yeah, I support that."

Studies, however, indicate that each time the United States cut income taxes across the board it corresponded to periods of unrivaled economic growth.

In 1964, Congress approved a tax cut originally sponsored by President John F. Kennedy that slashed the top income rate from 91 percent to 70 percent. As a result, the economy grew at an average of more than 5 percent annually throughout the rest of the 1960s. This stood in stark contrast to the three recessions that occurred between 1951 and 1964, when the 91 percent rate was in effect.

Similarly, the tax reform measures championed by President Ronald Reagan in 1981 and 1986 reduced the top rate from 70 percent to 28 percent—unleashing the longest period of peacetime economic growth in America's history.

In both instances, the booming economy resulted in more revenue for the U.S. Treasury. Between 1961 and 1968, tax revenues rose from $94 billion to $153 billion or more than 33 percent after inflation adjustment. During the 1980s, overall tax revenue climbed by 99.4 percent, with income tax revenue climbing by 28 percent between 1983 and 1989 after adjusting for inflation.

Contrary to Castro's rhetoric, every time a significant marginal tax cut has been enacted, the total revenue stemming from top earners has increased.

After the Kennedy tax cut, the rate of revenue collected from individuals making more than $50,000 (equivalent to more than $410,000 in 2018) grew by 57 percent between 1963 and 1966. The same situation played out in the aftermath of the Reagan administration's tax reforms. Between 1981 and 1988, the share of taxes paid by individuals in the top 10 percent of earners grew from 48 percent to 57.2 percent. Likewise, the share of taxes paid by individuals in the top 1 percent jumped from 17.6 percent to 27.5 percent.

Furthermore, there is existing doubt about the effectiveness of high marginal tax rates. Since at least the 1920s, economists have linked rising marginal tax rates with decreased levels of income reported to the federal government.

Adam Michel, a policy analyst at the Heritage Foundation, attributed this link to the ability of wealthy earners to evade the top income brackets through loopholes and offshore tax havens.

"When the marginal tax rate is high it incentivizes top earners to seek avenues of avoidance," Michel told the Washington Free Beacon. "Most countries attempt to find an optimal rate where it's easier for the rich to pay their taxes instead of hiring accountants, lawyers, and lobbyists to avoid the burden."

Historical trends seem to prove the point. Last year, the Tax Foundation reported that even under the 91 percent marginal tax rate of the 1950s, the top 1 percent of earners paid on average a rate of only 16.9 percent in federal income taxes.

It is also unclear if a 70 percent marginal rate, which would be the highest in the developed world, would be enough to fund all of the new programs being proposed. The Mercatus Center estimates that Castro's recently endorsed Medicare for All plan would cost taxpayers more than $32 trillion in its first 10 years alone. Few cost estimates exist regarding the Green New Deal and free college tuition.

In the past, opponents have argued that the United States cannot afford the hefty price tags simply by increasing taxes on the rich. Proponents, on the other hand, have cited countries like Norway, Sweden, and Denmark as proof such a formula is possible.

But Michel said it was important to take into account the regulatory and tax environments unique to Scandinavian nations.

"These countries have high-skilled workforces, no minimum wage laws, and strong entrepreneurial incentives," Michel said. "The myth of Scandinavian socialism doesn't hold up to reality."

Michel elaborated that most proponents of "generous welfare state programs" further ignore that in these countries the "marginal tax rates are not just higher, but broader as well."

A 2015 report by the Tax Foundation noted the top marginal rate in Denmark (60.4 percent), Norway (39 percent), and Sweden (56.9 percent) are broad enough to apply to 1.2, 1.5, and 1.6 times the average income, respectively.

Scandinavian countries, unlike the United States, also receive nearly 10 percent of their total GDP from a value-added tax, which is levied on a commodity through each stage of the production and distribution process. Functioning much like a sales tax, value-added taxes have long been controversial on the grounds that they regressively impact the poor.

"It remains to be seen if a more creative form of taxation would be required in the U.S. to pay for a Medicare for All and a Green New Deal," Michel said. "I'd have to assume all options would be on the table once the bill for these new programs was due."

Castro's exploratory committee did not return requests for comment on this story. The former secretary is expected to announce his candidacy for the Democratic nomination on January 12.