The politics of 2017 dwelled largely on the Trump/Republican tax bill that these columns have held to violate principles of sound fiscal policy and reasonable concepts of equity. While deficit spending is inevitable, even necessary, during recession, it’s asking for trouble down the road to explode deficits during a fully employed economy, as that tax bill does. Furthermore, the 2017 tax bill exacerbates after-tax income inequality that has been getting worse for several decades.

To their credit, congressional Democrats opposed that ill-advised tax bill. However, Democratic politicians have been timid and generally ineffective in boldly making the case for a decently progressive tax system. 

Some recently elected members of congress have not been so timid. Congresswoman Alexandria Ocasio-Cortez, known as AOC, has become the right’s latest villain with her assertion that income over $10 million should be taxed at 70 percent.

Let’s briefly review. Many Republicans and Conservatives favor a “proportional” tax system, commonly referred to as a “flat” tax. With this, all income is taxed at the same fixed rate. In contrast, most Democrats and economists favor a progressive tax system. With higher incomes and successively higher income brackets taxed at higher rates.

The 2017 tax bill remains mildly “progressive” in the sense that tax rates rise with higher income brackets. However, by adjusting the brackets and reducing rates, the degree of progressivity of the 2017 bill has been greatly reduced. In addition, taxing income from capital at lower rates than income from labor results in some wealthy citizens paying average tax rates lower than wage earners. (Warren Buffet has famously pointed out that he pays a lower average tax rate than his secretary.) The result of continuing to tax capital income at low rates, coupled with the 2017 tax bill that reduces tax rates for the wealthy, is a huge windfall for our nation’s wealthiest citizens. 

So what business has freshman congresswoman AOC weighing in on taxes? Plenty — she is in mighty good company with several Nobel laureate economists — including Peter Diamond, renowned authority on public finance.

I can’t resist a personal note on my early brush with Peter Diamond. During my first year in the University of California Berkeley’s Ph.D. agricultural economics program, Peter Diamond, a newly minted 23-year-old Ph.D. from MIT — purportedly the best student that eminent economist Paul Samuelson had up to that time — had just arrived at Berkeley. Ag econ students were required to take a couple of courses from the Economics Department, taught by Diamond.  Diamond’s lectures in that macroeconomics class were nearly incomprehensible — my limitation, not his. Fortunately, that class was co-taught with another eminent economist, Tibor Scitovsky. In one of life’s fortunate breaks, the final exam was composed partly of Scitovsky’s questions that I could handle. We ag econ students got through that harrowing course and, incredibly, I actually got an A for my efforts.

Peter Diamond later returned to MIT and a brilliant economics career. In 2010, he received the Nobel Prize in economics and was nominated by President Obama to chair the Fed. The Republican chair of the Senate Banking Committee led the opposition to Diamond’s confirmation on the ludicrous grounds that he was “unqualified.” His expertise was “in labor economics rather than monetary economics.” The Fed’s mission is to implement monetary policy with a major goal of promoting full employment. For this, understanding the labor market is obviously highly relevant. But then, hey, that’s politics.

A highly regarded study by Diamond, co-authored with Emanuel Saez, concludes that the optimal marginal tax rate for national economic growth would be about 73 percent for the highest income bracket, right in line with AOC’s recommendation. Lest this be discounted as the product of “academic scribblers” and a “radical congresswoman,” history is on their side. The top marginal rate during the 1950s was 91 percent. Even Conservatives consider this “America’s Golden Age.”

One need not rely exclusively on professional economic analysis to understand the rationale for a progressive income tax. Let’s start with values of fairness, and basic concepts introduced in freshman/sophomore economics classes, “diminishing marginal utility” and the “marginal propensity to consume.”

Diminishing marginal utility holds that additional units of a good confer reduced enjoyment for each additional unit. The second beer is less satisfying than the first. A dollar added to a million is less useful than a dollar added to the $25,000 of a working person struggling to pay bills.

The marginal propensity to consume is the proportion of additional income that is spent on consumption. A greater proportion of an additional dollar to a working person struggling to pay bills will be spent on housing, food and life’s necessities than an additional dollar to a millionaire. 

The implication for tax policy is that additional dollars in tax breaks will mean more to the working person and be more expansionary to the economy than an additional dollar for the corporate CEO who may hoard it, or use it for less productive purposes such as bidding up prices of land in Aspen. In that sense, increasing income inequality that transfers wealth upward to the wealthy acts as a drag on aggregate demand and economic growth. 

Then there is the matter of equity, or “fairness.” Sure, corporate CEOs and high-income individuals work hard to “get there.” But people performing jobs that are not well-rewarded in the market place also work hard at tasks that are essential to the economy. A more progressive tax system won’t by itself solve income inequality. But it is a necessary, though not sufficient, condition.

Sadly, some timid Democrats are backing away from the AOC’s proposed 70 percent. That top marginal rate is neither radical nor confiscatory. And incentives? How much over $10 million annually does an ambitious CEO or star athlete need to motivate competent performance? 

If not AOC’s 70 percent for income over $10 million, how about at least something above the current 37 percent top marginal rate? 

 — John Waelti of Monroe is a retired professor of economics.