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Newly elected Rep. Alexandria Ocasio-Cortez (D., N.Y.) and others have proposed taxing income above $10 million at rates as high as 70%, compared with the current top federal tax rate of about 40%. The proposal would directly affect about 30,000 Americans, or roughly 0.01% of the population. That might seem like a small number, but these Americans currently earn about 5% of the nation’s pretax income and pay roughly 9% of all federal income taxes.

The policy could change how people choose to work, save, and spend, which means there could be macroeconomic consequences. While the proposal is unlikely to go anywhere, it could provide a blueprint for what some liberal Democrats might try to accomplish if the party regains power in the Senate and White House.

One concern is that ultrahigh earners—their average yearly income is about $30 million—would respond to a dramatic shift in their taxes by working less or by decamping to jurisdictions with lower rates. Either outcome, if it occurred, would make everyone else poorer. In a recent paper, Charles Jones of the Stanford Graduate School of Business provocatively argued that people with the highest incomes contribute so much to society that they should be subsidized with a negative tax rate.

The good news is that these dire scenarios are unlikely. Top-earning Americans have shown surprisingly little appetite to move from high-tax jurisdictions, such as California (top state-tax rate: 13.3%) and New York City (top state and local rate: 12.7%), to states with no income tax. The people who tend to leave California and New York for Nevada and Texas are poor and middle-class workers in search of affordable housing, rather than rich people seeking lower taxes, according to Lyman Stone’s analysis of data from the U.S. Census and the Internal Revenue Service.

The rich could conceivably minimize their taxes by relocating to Puerto Rico, which allows residents to avoid paying federal taxes on investment income, yet few have chosen to take advantage. (Hedge-fund manager John Paulson has said he’s considering such a move.) Why would they leave the U.S. altogether when they fail to exercise existing domestic options?

Research shows the rich are relatively insensitive to changes in their marginal tax rate. This is one reason why Nobel Prize-winning economist Peter Diamond now thinks the “optimal” federal tax rate for the highest earners could be as much as 76%.

Perhaps inspired by such reasoning, the French government imposed a temporary “supertax” of 75% on incomes above one million euros in 2013-14. This had few notable effects besides the emigration of actor Gérard Depardieu to Russia. Similarly, the recent tax cuts on the wealthy pushed by President Emmanuel Macron—known as the “president of the rich” in France—have so far failed to boost domestic investment, productivity, or employment.

The other potential danger with sharply raising taxes on the rich is that even if the top 0.01% continued to work as before, the higher tax rate would reduce how much they could spend on financial assets. That, in turn, could depress market prices and discourage corporate capital spending. Moreover, shifting income from people who save much of what they earn to people who spend most of their income on goods and services could lead to faster inflation.

This is a legitimate concern in certain circumstances, but it hasn’t been relevant for the U.S. for many years. Capital isn’t expensive, but cheap: Real interest rates are low and valuation multiples are high. Industry has been suffering from a glut of excess capacity rather than from a shortage of supply. The problem has been too much saving at the expense of consumption, rather than too much consumption at the expense of investment. Before 2007, the depressive impact of rising income concentration was offset by rising indebtedness—just as in the 1920s. The subsequent crisis has forced consumption down to match incomes.

In this situation, raising taxes on the ultrarich to transfer purchasing power to the rest of society could end up making everyone better off by boosting aggregate spending on goods and services.

Marriner Eccles, a former chairman of the Federal Reserve, made this point repeatedly in the 1930s. As he put it in a speech in 1939, the rich should “provide relatively more rather than less of the total tax revenue as a means of maintaining and increasing consumption and thus of preserving existing investment and paving the way for new investment.”

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Since then, the tax burden has shifted from the rich to everyone else. Between 1935 and 1970, the average effective tax rate of Americans in the top 0.01% was 54%. Since the early 2000s, the average tax rate has been 37%, due to changes in income taxes, inheritance taxes, and taxes on corporate profits.

In other words, the tax burden has plunged even as the share of national income earned by the ultrarich has soared. Some economists think there is a connection, because lower tax rates encourage executives to push boards for bigger pay packets. At the same time, the average effective tax rate paid by Americans in the bottom half of the distribution has increased sharply, thanks to the steady rise in payroll tax rates between the mid-1950s and the early 1980s.

Making matters worse is that “means-tested” benefits are withdrawn as income rises. The net result is that the poor and middle class often face effective marginal tax rates equivalent to or higher than what Ocasio-Cortez has proposed for the rich. According to data from the Congressional Budget Office, a typical married couple with two children pays an effective marginal tax rate of 78% as wages rise from $30,000 to $60,000, while a single parent with one child pays an effective marginal tax rate of 69% as wages rise from $22,000 to $42,000. These implicit taxes are huge disincentives to work and affect many more people than tax proposals aimed at the top 10,000th of the distribution. •

Write to Matthew C. Klein at matthew.klein@barrons.com