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A conversation [locked post] over on ![[livejournal.com profile]](https://www.dreamwidth.org/img/external/lj-userinfo.gif)
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:
[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.
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).
[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.
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There's also the concept of "Deadweight loss": Inefficient allocation of resources.
The usual story involves a rich man mowing his own lawn. When asked why he didn't pay someone $50 to do it, he answered that he'd have to earn $500 to pay $50, and for $500, he'd mow his own lawn. (Marginal tax rates were higher when I first heard this.)
He's still working, but society has lost something by having him work on something he's not as good at. If I can pay you to do something you do relatively better than I, and vice-versa, we both gain. But the higher marginal tax rates are, the less sense that makes.
How much does this matter? It's arguable, but I think it's significant, especially at higher tax rates.
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So I work 25 hours in my specialty (software), also at $50/hour, earning $1250. After taxes (assuming a 30% marginal rate), I have $875, which is less than the $1000 I need to get it done. So I do it myself.
The guy down the street is in the reverse situation, and I could do his software project in 20 hours, but he winds up spending 25 hours doing it. If somehow we'd been able to swap tasks, we'd each have an extra 5 hours to do something useful (my favorite is to volunteer at the local high school), but the tax rate makes that impractical.
The effect is stronger the higher the tax rates (or other transaction costs) are.
It follows fairly directly from normal supply and demand curves: If you shift the price up (tax or other cost), the equilibrium changes, and the total benefit produced diminishes.
The question becomes then whether the revenue benefit from the tax is large enough to justify the loss.
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See also the bathroom remodel we did last fall. We know jack about building, let alone plumbing, wiring, and masonry, and we don't have the tools. It was a thousand times easier for us to call a guy and have him coordinate a bunch of people to come into our house and do their things using their own power tools than for us to figure that mess out. And buy a bunch of power tools which we'd probably never use again and have to find a place to store.
So I don't buy that.
*I make shit, as far as pharmacist salaries go. Retail starts at $45+/hr in my area, and after 2.5 years in my current job, I'm making $35.
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That I might be 25% more effective at software than hardware?
The numbers? (You should be able to verify them.)
That the effect is possible?
That it might be worth doing something yourself?
The whole body of standard economic theory, because you don't like some of the predictions?
It is certainly possible to find examples where the comparative advantage is larger than in my example: That's the point. The negative effects of taxation don't affect all of these choices equally, and are strongest when the tradeoff is small.
To be honest, I'm not sure if I'm not explaining this well enough, or if you really don't want to understand it. You've called yourself a Marxist: Consider why Marx made a deep study of capitalism before offering an alternative prescription.
That'll have to do for now: I'm off to volunteer at the high school.
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It was 90% in the 30s-60s or something like that, and the gap between rich and poor was a hell of a lot smaller. Did a bunch of CEOs and Rockefellers just quit one day?
I've also read a bit on the "going Galt" movement, but I haven't read anything that they've actually quit their jobs or become less productive.
I do plenty of things myself, BTW. Make coffee, cook food, shop, clean.
Behavioral economics, from what I read in The Economist, is a terrible field with a lot of theories that don't hold water. Because people aren't 100% rational machines, which behavioral economists tend to assume.
I don't want to make a deep study of economics. It's boring, and it's not something I can understand (like physics or advanced calculus.) I rely on people like Paul Krugman.
ETA: It occurs to me that I'm more likely to defer to expert opinion in matters I'm not well-versed in. I'm also more likely to pay people to do things I'm not good at or expert in or particularly interested in investing my time and energy into (see: rebuilding the bathroom from scratch). So paying someone 2 hours of my work to change my oil, or 4 hours to rotate and balance my tires, because they're experts and have the equipment, etc, doesn't faze me.
I'm still not seeing why money is the one and only thing that causes productivity, according to this "higher marginal tax rates decrease productivity" argument. Because in my experience as a living, working person, it's nonsense, falling into that bad behavioral economics theory.
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These days, the online version of the Economist is worth the paper it's printed on; he paper version isn't even worth that. Far too often it allows politics to get in the way of economics.
Is there serious evidence (other than one guy who up and left, without paying a dime to the broke state of California) that an increase in top marginal tax rates stops people from working or decreases their productivity?
Yes. Large numbers of high income people have moved out of California. Large numbers of companies have moved out of California to places with lower taxes and property values. This has lowered the tax base and is one cause of California's financial shortcomings (the inability to ever cut the budget being the bigger one).
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I'd heard that the problem with California was due in no small part to the voter referenda, which allow people to vote for social programs without requiring funding, combined with a supermajority being required to raise taxes in the legislature.
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If you want more information on changes in high income earners in California (and companies moving out), you'll have to find them on your own. That data is in the bowels of places like the IRS and census websites.
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I often hear people complaining about the California government spending too much money, but I never hear what it is we're supposed to cut.
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(You can look at the numbers yourself if you'd like: For example at http://www.ebudget.ca.gov/pdf/BudgetSummary/SummaryCharts.pdf)
We're getting more government per person than we used to.
As to what I'd cut? Much of it, fractionally. If you want this week's annoyance, it's STAR testing. 3 days of student time are spent taking tests, and substantially more than that in preparations, in a significant distraction from the actual goal of educating students. (If you want useful data, do statistical sampling, and have it administered by people with less incentive to cheat.)
But for big cuts, it really does have to come out of one of the big slices of the budget: Education, "corrections" or health care. (I have politically unpopular opinions on all three, of course.)
I do wonder why "Business, Transportation & Housing" is up almost 60% in one year, though.
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You're right that your experience as a worker isn't particularly strong support for the thesis, but that's because that's not where the changes happen. Experience running a business or investing would be more relevant. Do you have a retirement account? Presumably, it's tax-deferred ...
Marginal tax rates were lower than 90% for much of the 30s-60s range (and higher for some): Tax rules get changed a lot. But there were also a lot of 'tax shelters', which were gamed to make real income not show up in the IRS income data. Are you measuring the gap by income (whose data?) or by wealth? In any case, there do exist many ways to reduce tax-visible gains, and they're used, a lot.
As for not studying economics: That's unfortunate. Based on how much you write about economic topics, it's pretty clear you care, and arguing from a position of deliberate ignorance is kind of strange. But if you balk at stuff like interpreting a supply & demand graph, I don't think I can explain some of this stuff to you. (Nor does it sound like you've understood Krugman, who has a lot of useful stuff to say.)
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I'd rather sleep the extra half hour and make it myself.
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But more to the point, if you're earning a million a year, how big a deal is $50 really? I would claim that most people earning $1.2 million/year wouldn't even bother negotiating over a salary change of $50/week: that wouldn't even show up until the fourth significant digit! Would this guy even notice if his paycheck were off by that much? Where's the incentive?
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On top of that, wealthy people tend to be well aware of such issues (exceptions abound, especially among lottery winners), and if given a choice, why not take the better option? I pick up pennies, for example: It beats not picking them up.
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I think this ties in to akiko's objection in the thread above, also. It's not that she doesn't buy the math or the fact that people have different efficiencies. What she's not buying is the idea that every (or a large majority) of people's decisions are going to be based *strictly* on a monetary bottom line compared to their earning potential per hour. Although I don't deny such considerations have some degree of influence on some decisions, I think you're overstating them. For one thing, a lot of people are on salary - if I mow my lawn while not at work, there is no potential earning that I'm losing. Sure, there's hobbies I'd rather be taking part in, but we already dismissed hobbies from our "productivity" metric in the anecdote of the guy who left CA.
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Also, "The Wealthy" is generally a self-selected group of frugal people. The ability to accumulate and earn money from capital is a primary reason that people become (and stay) wealthy.
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Newt
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Also, the reason poor people spend money when they get it is because they have it so rarely. There's no education about investment, saving, etc among the poor. Your example of people living frugally, etc, assumes that there are opportunities available, which for a large group of people there are NOT.
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Same numbers, different interpretation. I choose the one with hope.
--Beth
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I don't know if you read
Regarding the lottery: Are you sure about that? Sure, there are newspaper stories about people who win and then spend it all within a year, but that's not good data. Obviously, the newspaper is printing it because it makes a good story, not because that's an actual tendency.
Also, moving from one class to another is a hell of a lot easier if you already have a leg up. Going from third to fourth quintile will still take work, but if you're in the third already you likely have a lot of things available to you, like education and the expectation from your parents and peers that you'll do well. (That makes a HUGE difference.) If you're in the bottom or fourth quintile, not so much. This whole "pull yourself up by your own bootstraps" notion doesn't work so well if you can't even afford to buy boots.