U.S. Rep. Alexandria Ocasio-Cortez, D-N.Y., would find herself at home in Stockholm.
The newly minted lawmaker is proposing to lift the top marginal tax rate to 70 percent on incomes starting at $10 million. The idea has drawn both praise and jeers from across the political spectrum.
For a real-world example, critics and fans alike should look to Sweden. The Nordic country has a marginal tax wedge — the difference between the cost to the employer and what a worker takes home — of 69.7 percent on salaries above $79,000. That’s almost 30 percentage points higher than in the U.S., and it kicks in a lot earlier than Ocasio-Cortez is proposing.
Critics of high taxes claim the policy stifles economic growth by reducing the incentive for people to work. But Sweden’s employment rate is 77.5 percent, beating the United States’ 71 percent. The Nordic country has also surpassed the U.S. in terms of economic growth this decade, expanding 2.7 percent a year, on average, compared with 2.2 percent for the U.S.
Ocasio-Cortez, 29, is a former campaign worker for Sen. Bernie Sanders, who has praised the Nordic economic model. She wants to raise taxes to pay for programs to fight inequality and climate change and provide health care for all, benefits already enjoyed by Swedes and many Europeans.
Income inequality, and its impact on growth, has become one of the key issues explored by economists in the post-financial-crisis world. A recent paper by economists Peter Diamond and Emmanuel Saez calculated that the optimal top tax rate would be about 73 percent.
High taxes have gained acceptance in Sweden and across the Nordic region, where citizens enjoy state-funded access to services such as child care and education. Losing out on those benefits, even if take-home pay grows, is considered too great a risk.
“Taxes are never collected just for the purpose of collecting more taxes,” said Olli Karkkainen, an economist at Nordea Bank. “What matters is what the taxes are used on.”
In the Nordic countries, the negative effects of high taxes are compensated for by the services that tax money buys — for instance promoting employment by supporting child care, he said.
To be sure, even Sweden has its limits when it comes to taxes. While the Social Democratic-led government has raised levies over the past four years, that came after almost a decade of tax cuts from the previous center-right government.
Economists say high taxes work in the Nordic region because the notion of state welfare is so deeply rooted in its culture.
The region also has a highly educated population, multiple supports built into the labor market and a relatively high level of trust in government, which allows the system to work.
“No country can start with a clean slate,” said Karkkainen. “So taking the Nordic model and attempting to implement it in the U.S., which has a much larger population and very different history, it wouldn’t work there in the same way as it works here.”