Wealth and motivation

[steuard]

A conversation [locked post] over on akiko's journal has me thinking about taxation, particularly taxation of the very wealthiest people in our society. In this post I'm not interested in most of the arguments about what tax rates are appropriate or fair for various income groups, but I need to describe one argument for context. One major argument against higher tax rates for the very rich is that people who earn large incomes tend to be the most productive as well: taxing them too heavily would reduce their incentive to work and thus hurt society as a whole.

But that got me thinking: when you're already earning many times as much each year as you need not just to support yourself but to purchase almost any luxury[1], what is the incentive to work harder? (Heck, what's the incentive not to slack off?) I see a few possibilities, but I'm not sure that any of them would be affected by even a moderate increase in marginal tax rate:

• A desire for the next super-luxury item. There are always things that you don't quite have the money to buy; maybe the person's eye is always on that next goal that's just out of reach. But if this is the motivating factor, it would be just as true regardless of marginal tax rate.


• A means of keeping score. Some people may want to earn more to prove to themselves and to the world how valuable they are (either directly via their salary or indirectly by being able to afford more visible luxuries than their peer group). But it seems like any monotonic function of raw salary would have the same score-keeping benefit in principle. As long as the marginal tax rate isn't so close to 100% that nobody can tell you're earning more, it shouldn't much matter.


• A plan to pass wealth to the next generation. Some people want to earn lots of money so their children won't have to worry about money. But this isn't all that different than the points above (as noted in [1], every two years' salary could set up a kid in reasonable comfort for life). Past a certain point, your kids' wealth is pretty much guaranteed, too (and your grandkids', for that matter).

So what's the actual reason that a higher marginal tax rate on the super-rich would discourage them from working more? I'm sure I'm missing something. Any thoughts?

[1] According to this data, the top 1% of earners in the US make an average of $1 million each year: that means that every two years they could set up an endowment to support Kim and me at more than our current standard of living basically forever.