AOC and Elizabeth Warren’s tax reform proposals sound promising – but they won’t fix the system

While the idea of imposing a wealth tax is not outlandish, both senators’ suggested level of tax would be very high by global standards

The mood in the US is shifting towards higher taxation. Both Alexandria Ocasio-Cortez and Elizabeth Warren have embraced the idea that rich Americans should pay more to Uncle Sam.

AOC, as we have learnt to call her, wants a top marginal income tax rate of up to 70 per cent on earnings of above $10m (£7.7m). Senator Warren wants a wealth tax of 2 per cent on people who have a net worth of more than $50m, and a further 1 per cent on billionaires.

Both are astute politicians from the left of the Democratic Party. Both seem to see their plans as opening shots in a debate. And both are driven by a desire to tackle the rise in income and wealth inequality that has occurred in the US over the past quarter century.

They would not be making these pitches of they did not think the plans would resonate with a large segment of the electorate. In as far as opinion polls mean anything, they seem to be right. A Fox News poll earlier this month showed that 70 per cent of Americans supported higher taxes on the rich.

It isn’t the place of Britons (or indeed any non-Americans) to have views about how much tax Americans should pay – any more than we should worry about what Germans or Chinese people should pay.

What we can do, though, is to look at US taxation in a global context and then see how these plans might tally withy international experience.

First, the overall tax level. Here the US is on the low side compared with other developed countries.

According to the OECD, the average general government tax take as a percentage of GDP in 2017 was just over 34 per cent, with France and Denmark at the top with 46 per cent and Mexico at the bottom with only 16 per cent.

The US was 27 per cent, about the same as Australia and a bit higher than Ireland and Korea. (The UK at a bit over 33 per cent was just under the average.)

Now you have to be a bit careful with these figures because in some countries local service charges are on top of this, and in the US a larger proportion of people’s income goes on health insurance than elsewhere, but it is broadly true to say that the US is a relatively low tax country.

What about income tax? Well, if you just look at the top marginal rate, the US is pretty much middle of the pack. Its headline rate is now 37 per cent, lower than France’s 50 per cent or the UK’s 45 per cent.

But that is Federal tax.

If you live in California, you pay up to another 12.3 per cent on top of that, so you are within a whisker of 50 per cent. In New York City you pay nearly 9 per cent, so you are higher than the UK. Switzerland is 40 per cent, and Canada 33 per cent.

It is true that the US tax system has large loopholes; these top rates start at very high levels, and if you want to move to a low-tax state such as Florida, taxes are indeed much lower.

But overall the US is pretty much middle of the pack.

It is also true that no country anywhere in the world has a top tax rate of anything like 70 per cent. They used to. We had a top tax on earned income of 83 per cent in the 1970s and 98 per cent on income from savings. (Remember the Beatles song about the taxman?)

But no one does now. So what AOC is proposing would be a real outlier by global standards.

What about wealth taxes? There are lots of these around the world, usually levied on property. In Canada, British Columbia has an additional tax on expensive homes.

France has a tax on property, having experimented with a tax on wealth more generally. Spain, the Netherlands and Norway all have various forms of wealth taxes, all levied at quite low levels and mostly focusing on property.

In the UK, there is high taxation on expensive property sales, which could be considered a form of wealth tax. But a lot of countries, including Germany and Sweden, have abandoned wealth taxes in the past 25 years, so there is no general trend towards wealth taxation.

Conclusion? While the idea of imposing a wealth tax is not outlandish, Senator Warren’s proposed level of the tax would be very high by global standards, and the experience of wealth taxation in other countries has not been particularly encouraging.

So what would be the ideal tax reforms in the US if it wanted to come more into line with the rest of the world?

One is that it should introduce a Value Added Tax of some sort, for just about every other developed country has one. That would not help reduce inequality, but it would raise more money – enough to pay for universal health insurance, perhaps.

The other would be to close loopholes – which are unusually extensive – and get the rich to pay more tax that way.

There are problems with the US tax system. But neither AOC’s nor Warren’s proposals would fix them.