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]

Or maybe the problem is that taxes are too low in Nevada, that he was tempted to move?

Clearly the outcome is suboptimal, in that he'd have rather not moved, and California would rather have had the tax revenue. But the structure of taxes doesn't have that degree of moral clarity.

Consider 3 cases:

There's a tax on cigarettes: Am I denying California its just due by not smoking? That's a punitive tax, and as citizens we're supposed to avoid the taxed behavior (mostly).

The income tax: This is a revenue tax, and we're supposed to keep earning (mostly).

The gas tax: This is a proxy for a usage tax to maintain the roads. It seems silly to say I'm evading this tax by (for example) walking to the high school to volunteer, but the intent really is a mixture of adjusting usage habits and raising revenue.

In some cases the intent is unclear, and even the law itself: There's a derivatives trade that I'd consider, but the IRS's position on it is, more or less, that Congress was unclear when they made the law: Until a court clarifies it, no one knows how it should be taxed.

It sounds like you have a theory of the social contract which includes a moral obligation to pay taxes (beyond the legal obligation), and, opportunity permitting, I'd enjoy discussing that with you. (There's a line in the tax form for "I'd like to pay this much more tax than required." Do you do so? Why or why not?)

I take something resembling a pragmatic view: The tax code is what it is, and we should comply with the law as it is, and at the same time consider how the law should be changed to improve things. That includes a pragmatic view as to how society as a whole will react to the changes: Many emotionally appealing alternatives turn out not to work well in practice.

In terms of this example: If the money "belongs" to California, why was it not taxed when the stock was obtained? Or maybe the taxes should have come out of the corporate earnings that justified the stock price (that tax was paid). Or maybe the earnings of whoever bought the stock? Presumably those taxes were paid too.