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The “Green New Deal” Is a Fiscal Fantasy

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The “Green New Deal” Is a Fiscal Fantasy

Alexandria Ocasio-Cortez is economically illiterate—but what is Paul Krugman’s excuse? January 14, 2019
New York
Politics and law
Economy, finance, and budgets

Congresswoman Alexandria Ocasio-Cortez—AOC, as she’s often now called—claims that her so-called Green New Deal will help end global warming and cure several societal ills. The effort, she concedes, will be expensive, but the dangers we face from climate change and other social problems warrant national mobilization, on the level of the Second World War. Paying for the plan, she suggested, might involve a dramatic hike in the top marginal income-tax rate—up to 70 percent. That figure shocked some, but not Nobel Prize-winning economist and New York Times columnist Paul Krugman, who considers it “reasonable.” Details remain vague, but some context on the AOC plan, and on the sleight of hand that Krugman uses to support it, is revealing.

So far, the only concrete step Ocasio-Cortez describes to enact the Green New Deal is the formation of a House select committee to formulate specific goals. On the environmental side, these would include, among other things, expanding renewable-energy sources until they provide 100 percent of the nation’s power; building an energy-efficient “smart grid;” upgrading every residence and industrial building in the U.S. for energy efficiency, comfort, and safety; eliminating greenhouse-gas emissions for industry and agriculture; funding “massive” investments to draw down greenhouse-gas levels; and making the United States a leader in the use and export of green technology.

To these ambitious goals, Ocasio-Cortez adds a long list of social objectives: providing training and education for the energy transition, including “job guarantees at a living wage for everyone who wants one”; diversifying the economies of regions dependent on fossil-fuel extraction; helping communities most affected by pollution; protecting the “sovereign rights of tribal nations”; mitigating racial, regional, and gender-based inequalities; developing universal health-care and income-support programs; and ensuring that organized labor has a major role in all these efforts.

Achieving even a small portion of this to-do list would have enormous costs. At last count, there were some 136 million housing units in the United States. Upgrading each unit to high standards of energy efficiency would cost, conservatively, at least $10,000 per home, adding up to a total cost of $1.3 trillion. Doing the same for industrial structures would easily exceed that amount. The single-payer health-care part would cost another $3 trillion or more, annually. Stabilizing carbon dioxide in the atmosphere would add another $1 trillion to $2 trillion to the price tag—and all these still only account for three items on AOC’s list.

To be fair to Ocasio-Cortez, she does not downplay the costs. She did, after all, draw a parallel to World War II. She has also acknowledged that a 70 percent marginal tax rate would increase annual federal receipts by only about $225 billion—far short of what would be needed. For the rest of the cost, she would rely on debt, “printing money,” and government willingness to take an equity stake in some of the enterprises involved.

AOC’s proposals to expand government ownership and take on more debt didn’t cause much of a media stir. What did get attention was her suggestion to raise taxes on the wealthy—in part because Krugman has taken up the fight on her behalf. Krugman argues that higher taxes hurt the rich less than they hurt the non-rich, that scholarship has shown that a high marginal rate is “optimal,” and that the U.S. economy has prospered in the past with a 70 percent top rate—and, in fact, in the 1950s and early 1960s, it thrived under an even higher (92 percent) maximum rate. Krugman’s point about relative levels of pain is irrefutable but also beside the point. Of course, the rich can cope better with a higher marginal tax rate—that’s why the United States has a progressive system. The more important issue is what such a high rate would do to work incentives and business expansion and innovation. Krugman denies that higher rates would have a negative impact, but several studies either differ with him or find the answer at least ambiguous.

On the question of an “optimal” tax rate, Krugman quotes two academic studies, one by Nobel laureate Peter Diamond with Emmanuel Saez and another by David Romer and his wife Christina, former head of President Obama’s Council of Economic Advisors. The first study puts the optimal tax rate at 73 percent; the Romers say 84 percent. What Krugman fails to mention is that neither figure takes account of state and local taxes. When Diamond and Saez include these taxes in their calculations, they adjust the optimal federal rate down to 48 percent—much closer to the present maximum rate of 37 percent. The Romers don’t offer that adjustment, and their work has other problems. It concentrates on the U.S. interwar period, when a statistically insignificant number of American taxpayers were in the highest tax bracket. The authors admit that this matter may introduce biases into their conclusions, as would the number of other shocks befalling the economy at the time, such as the Great Depression. Krugman fails to mention these points as well.

Krugman and AOC play fast and loose when it comes to the country’s prosperity under high tax rates. It’s true that the United States prospered with a top rate of 70 percent and higher in the mid-twentieth century. But the tax code then included loopholes that drastically reduced the amount of income subject to those rates. All the tax cuts since then have closed those loopholes. One can forgive Ocasio-Cortez for missing the difference, as she has consistently shown economic and historical ignorance, but Krugman should know better.

In the 1960s, 1970s, and early 1980s, for instance, when the 70 percent maximum rate prevailed, taxpayers could write off all state and local taxes, with no limit—including sales taxes, licensing fees, property taxes, and income taxes. They could also write off all interest expenses without limit—on their mortgages (no matter how many), all credit-card debt, auto loans, or home-improvement loans. Imagine the benefits to a plutocrat, buying a third home or a fifth Bentley. His tax would be calculated on net income, reduced by any fees, sales, or transfer tax, as well as all the interest expenses on the mortgages or auto loans over the years. The code included dividend exclusions and generous provisions for capital-gains preferences. Taxpayers back then could shelter unlimited amounts in IRAs. Social Security payouts were tax-free, no matter how high a person’s income. Individuals could write down their taxable income through averaging provisions and transfer as much income as they liked to their children, who paid at lower rates. There was no limit to rental-loss deduction. Business losses counted against all income.

Given these breaks and loopholes, it’s no surprise that few people actually paid those high rates on much of their income. The nonprofit Tax Foundation estimates that in the 1950s, for instance, when the top statutory rate was 92 percent, the top 1 percent of taxpayers wrote off so much income that their effective average federal tax rate was about 17 percent. If our highest earners today were offered the 2019 code or the old one, they might well go for the old rules, even at a 92 percent top rate.

Defending the proposed high marginal tax rate, Krugman displays a graph showing the top tax rate mapped against economic growth—growth being strongest when the top rate was highest. But perhaps that period of high growth was driven by the low effective tax rate on the wealthy during those years of ostensibly high statutory rates. This explanation is as plausible as any other, though Krugman does not discuss how much tax the wealthy actually paid in the 1950s. Nor does he concede that economic growth rates over the last 70 years may have been affected by anything besides the movement in the top statutory tax rate.

Perhaps all the stir over AOC and Krugman matters little. The Green New Deal has no evident support from House Speaker Nancy Pelosi, or even many Democrats. Media coverage, however, has made Alexandria Ocasio-Cortez—and her innumerate economics—part of our national conversation.

Photos: Rick Loomis (left), Neilson Barnard (right)/Getty Images

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