Ray Dalio Warns of “Huge” Impact of 70% Tax Rate

Ray Dalio

Alexandra Ocasio-Cortez sees herself as a real champion of the people. Raising tax rates is a double-edged sword though, and we need to be wary of the side of it facing us.

Newly minted Rep. Alexandria Ocasio-Cortez has come to Congress with a mission. Sure, a lot of representatives do, but Ocasio-Cortez is particularly passionate about hers, which has been made quite clear in the past few days.

A self-professed socialist, she states that her main aim is to reduce the amount of economic inequality in America. She’s not alone in this concern, but the usual approach is to seek out ways to improve the standing of the people on the impoverished end of the scale, the sort of thing that socialists do.

Our government at least has socialist leanings, and is actually a hybrid model, where we do have programs that address this inequality at least somewhat, to a degree that some may find appropriate, although a true socialist would argue that we need to do much more.

Rep. Ocasio-Cortez has opened the bidding by going after the very wealthy, and in particular, billionaires, and believes it is immoral for people to have this much money or earn amounts she considers excessive.

If we remember the 99% protests from a few years ago, she is not alone in being upset that there are people this wealthy out there. That did result in a lot of fists being shaken but hardly any constructive debate, including things as coming up with some solutions or especially looking into what the implications of any changes here that we make may be.

Her approach, like the 99% protesters, is to take aim at those of such abundance and look to knock them down a peg or two. The weapon of choice here is usually taxation, and that’s exactly what her plan is, suggesting that we raise the marginal tax rates to 70% for those who earn more than $10 million a year.

Immoral may not be the right word here and may have spared her from the bit of backtracking she ended up having to make with stating that not all billionaires are immoral, and using the term unfair would have been a better choice. It is hard to imagine how people using their talents to earn more money in a completely honest way for instance could be seen as immoral in any valid sense.

She does seem to have a particular issue with Jeff Bezos and the helipad that he is planning to build in Amazon’s new corporate digs near her district, even seeking to insult his company by calling it an online Walmart. It’s not made clear why this would be an insult, and maybe you have to travel in her circles to get this, but this does give us a glimpse into the congresswoman’s mindset.

Ray Dalio Weighs in On the Discussion

Perhaps getting people who make over $10 million to pay more in taxation to the government will reduce income inequality a tiny bit, having them only make $15 million instead of $20 million for instance, but this does nothing to help those who she feels deserves better, as it is not likely that this will serve as any consolation to them.

It does raise more money for the government though, at least on the face of it, but oddly enough, this plan if hatched could reduce instead of increase tax revenue and have other undesirable economic consequences.

Legendary fund manager Ray Dalio took time to answer some questions about the implications of such a tax plan while attending the World Economic Forum in Davos, Switzerland. Dalio isn’t just a fund manager, and he’s not even just the world’s most successful fund manager ever. He’s also an expert in the world of financial macroeconomics, and is particularly well known for his macro insights and understanding, which he has used to build up his $18 billion personal fortune as well as building even more wealth for his institutional clients.

Very high marginal tax rates aren’t new to the U.S., and we had even higher ones than what she is proposing back as the 1950’s. The idea of progressive tax rates is to have those who can pay more in tax pay more, and there’s no arguing that people who make over $10 million a year certainly could.

Just because they can doesn’t necessarily mean that they should, even setting aside concerns about whether this sort of thing is fair or not. There is more on the line here than reducing the income of a very small percentage of the population and perhaps feeling good about that, or even raising more tax money from raising the rate this much for these very wealthy taxpayers.

Dalio agrees with Rep. Ocasio-Cortez that economic inequality is an important issue but disagrees with the approach. He warns that “how tax rates are changed will have a huge effect on incentives and could have a huge effect on capital flows, and that will have big effects on markets and economies.”

How This Would All Play Out

We don’t have to look too deep to see how this may play out. One of the biggest fears with increasing tax rates for the very wealthy is that they may simply leave the system and move elsewhere. This may not be a realistic option for the great majority of us, but those of great means can often live wherever they want, and we already see a lot of money being moved offshore, and sometimes the people go with it.

It isn’t clear whether the intention of this 70% rate is to just apply to earned income, and not capital gains, but that seems to be her idea thus far anyway, because raising the capital gains rates is a different project entirely. If capital gains were part of this, this would dramatically raise the concerns and we’d probably see a massive migration of money.

This really does limit the scope of the change though, to those who earn over $10 million a year, and that’s not a lot of people. If such a change were implemented, people could just restructure things to circumvent it pretty easily, like taking more of their compensation in stock, or setting up corporations to get around this rate, and there’s not much we could do to stop them in fact.

This is just one of several issues that could have a real negative impact on the U.S. economy as a whole, and we need to weigh these decisions very carefully before we ever decide to implement them.

In the end, something like this won’t have much of an effect at all in knocking much off the top of the pyramid, in other words it won’t do much good to reduce their income or raise money for the government, but to the extent it does work it certainly could do harm, as those who are familiar with the way these things work such as Dalio understand only too well.

Rep. Ocasio-Cortez’s story is one many may find likeable, a waitress going to Congress essentially. She certainly has ambitions but this idea just isn’t a very good one, all things considered, and all things always need to be considered.

Robert

Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.