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

[jon-leonard.livejournal.com]

Which part don't you buy?

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.

[feuervogel]

That it really makes that big a difference in tax policy. 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?

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.

[jminnis.livejournal.com]

Behavioral economics, from what I read in The Economist...

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).

[feuervogel]

The plural of anecdote is *still* not data.

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.

[jminnis.livejournal.com]

Spending in California has increased by nearly 10% per year since I moved to California 14 years ago (in easy to find terms, it went from $56 billion in 1998 to $131 billion in 2008 - a 9% annual growth rate). Yet, you think the problem is that the state can't raise taxes? I'd argue that the problem is that the state keeps spending. I agree that the voter initiatives are a driver of this problem, but the fact is that the politicians just can't stop spending either.

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.

[feuervogel]

http://steuard.livejournal.com/28386.html?thread=116194#t116194 explains my problem.

[corpsefairy.livejournal.com]

The state *has* to keep spending because our population is growing, and we need those services that we're spending money on.

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.

[feuervogel]

MediCal, duh. And other things that help those lazy poor people, who ought to be pulling themselves up by their bootstraps!

[jon-leonard.livejournal.com]

The population is growing at a rate of between 1% and 2% per year; the expenditures by much more than that.

(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.

[jon-leonard.livejournal.com]

There are various studies as to how large the effect is, and it various substantially across income levels. Pure wage earners have the least control over their income structure and the least effect. At the high end, the correlation is apparently as high as .57: Try to increase tax rates to get $100 more, and $57 of income vanishes. Across the whole range of incomes, the sensitivity is apparently around .4.

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.)