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We explain with potatoes.
A few weeks ago, Rep. Alexandria Ocasio-Cortez (D-NY) suggested that the top tax rate for the very rich should be 70 percent.
The current top income tax rate is 37 percent, which makes Ocasio-Cortez’s proposal seem radical. But she rightfully pointed out that, as recently as the 1970s, top tax rates were in the 70s.
Doing things just because we’ve done them in the past is a bad rationale for policy, but there’s an actual economic rationale behind a 70 percent top tax rate. And it comes from something called “optimal tax theory.”
It starts with the simple premise that we should tax people to optimize the well-being of all citizens. And ultimately that requires takes money from people who don’t need it (the rich) and giving it to those who do (the poor) — and continuing to do so until it’s counterproductive.
So when MIT’s Peter Diamond and UC Berkeley’s Emmanuel Saez explored this question in a 2012 paper, they came up with a top tax rate that would optimize welfare: 73 percent.
This video explores the idea of optimal tax theory using … potatoes.
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