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.

Comments

[steuard.livejournal.com]

I agree with this: as soon as the benefit of those last few percent is outweighed by the cost of achieving it, most people decide that's where they're going to call it quits. But I'm not sure that this is at odds with anything I said above: my big question is "What IS the benefit one gains from earning $1.8 million/year rather than $1.6 million/year?" From my perspective as an earner well below those rarefied heights, it naively seems like it would be a lot like getting those last few percent: nice and all, but maybe not worth losing more sleep. If a lot of people really do perceive that increase as a big deal, I'm very interested in knowing what they get out of it.

[ukelele.livejournal.com]

Oh, heck if I know ;). I'd be fine with the $200K between those numbers, personally.

But I suspect there are people who use those numbers for scorekeeping -- the relative mattering more than the absolute. And I know from my teaching experience that people can and do live staggeringly expensive lifestyles. I'm sure I've met people for whom those differences are salient. But as I, personally, do not have five children in private school, a nanny for each of them, first-class trips abroad in every major school vacation, a ski chalet in Colorado, a house on the Cape, a designer wardrobe, et cetera, I can't quite get my head around it.

(Not, by the way, hypothetical examples, although I'm not sure that I know any single family that did *all* of those things. But the five kids/five nannies/private schools thing I know happened in at least one, and probably multiple, instances. And the other things were common enough.)

[zathrus.livejournal.com]

Chris's current salary is more than double what his starting salary was. Eight years ago, I knew that an extra $10-15K would make life a whole lot easier, but would have thought that doubling our income would remove all possible financial pressures on us. Now, I know this to be false -- we still can't fix our topologically interesting basement floor without carefully considering where the money's coming from, and I'm still driving an 18-year-old van until we can save up the cash to replace it, just for two random examples. Life is far more expensive, in general, than we tend to think it is, and the activities involved in making $1.8MIL are likely not cheap.

There are three points I can think of to contribute to this discussion. The first is that, while gaining a luxury is merely nice, giving up that luxury is often very difficult. I read ukelele's description of a staggeringly expensive lifestyle and am almost struck dumb at the extravegance. But can you imagine sitting down with a kid who's grown used to that lifestyle -- excuse me, five such kids -- and telling them that they'll be staying home for all of summer vacation? Or that they will no longer have a nanny? Or that they will be attending the local public school next year? It would be a difficult adjustment. And if you're going to make all those adjustments, you might as well pick up and move to some small Central American country or some such where you can keep all those things, and take your money and earning potential out of the United States altogether.

The second point is the work it takes to earn that last $200K. Chris and I have some experience with overtime and earning extra money, albeit on a much smaller scale. Chris is salaried; our regular, predictable needs are covered. However, he sometimes gets paid overtime under certain conditions; since this money is recorded separately on his paycheck, it's pretty easy to see the effect that the marginal tax rate has on it. When an entire evening gets taken up with work, when that translates into lost sleep, a family supper missed, an evening at the park missed, and kids getting tucked into bed without Daddy there, we notice. In order for that evening to feel remotely worth it, the monetary compensation for it -- the takehome compensation, after taxes, 401(k) withholdings, etc. -- needs to also be something we notice. For us, that doesn't take $200K -- but if it were a regular pattern and we were already making $1.6MIL, on an annual basis, it very well might. And I can tell you that at our current marginal tax rate, it's getting rather borderline, and we're not that high on the tax rates.

The third point is that not all things that rich people spend money on are necessarily materialistic gadgets and luxuries. There are indeed people living rediculously opulent lifestyles -- but many rich people are living fairly reasonable lifestyles in houses that are simply very nice, but not ostentascious. Many of these people, instead of spending that extra money, would invest it or donate it. I have way more business ideas than I have the resources to implement; if I were to be presented with an extra $200K, one or more of them would likely get implemented. Similarly, I know of way more worthy charitable organizations than I am able to support currently; just for one random example, I read recently that the cost to provide clean drinking water for a refugee camp is around $175K. (That includes manufacture, shipping, installation, and maintenance, I believe, for a device specially developed for use in such circumstances.) Having to throw away requests for aid from worthy organizations trying to do worthwhile things that save lives is one of the drawbacks for us of making a fairly reasonable salary.

Newt