Something I don't understand that is sure to get me flamed

[tim]

So there's this idea that if we increase taxes on the rich, then rich people will stop working so hard (that the rich work hard is already questionable, but let's go with it) and, I don't know, stop producing all the social goods that rich people produce.

I mean, I think it would be great if just increasing taxes, by, say, 2% on household income above $500,000/year would make some of those high earners say, "Goshdarnit, it's not worth it for me to earn this much money if the government is just going to take it away. I better get a job teaching in an inner-city elementary school instead, brb." But somehow, I don't think that's going to happen.

Is it *really* that easy to stop people from being greedy? I'm not sure greed would deserve its deadly-sin status if it was that easy to eradicate.

And while I'm at it, what's up with accusations of "class warfare"? Rich people have been waging war on everyone else since, oh, whenever it was that some people started being rich. (In fact, that's how you get rich in the first place.) The rest of it is just class self-defense.

Comments

[eriktrips]

is that the reasoning? I just thought that rich people don't have to pay their debt to society because they control the government, especially the federal government. I didn't even realize there was a rationale behind it, but I guess that they have to use something so that the poor slobs who will always be poor will keep supporting the rich who have no intention of ever doing anything good for the poor slobs. I suppose if someone who really does work hard thinks that taxing earnings based on investments and interest and other types of nonwork is actually an assault on Hard-Working People, then they will continue to let those with way more money than they will ever have make sure that they will continue never to have it nor any sort of safety net should they lose their jobs.

it's all propaganda to me. I mean, it's all propaganda, left and right, but the right is motivated by greed almost exclusively, except when they are motivated by morality, except when morality somehow gets in bed with greed, which is where we get things like the prosperity gospel. "class warfare" I think is a term that the right borrows from Marxist writings in order to try to make people think that defending their class interests is the same as believing in communism--which maybe it is, and maybe that's not such a bad thing, but I think they are counting on "us" not thinking critically about any of that. personally I think time is past due for class warfare. when I first heard the phrase being used to preempt discussion I thought "but wait--class warfare is precisely what we need!!"

I guess I am not "mainstream."

[tim]

There really, really is a popular argument that if you raise taxes, people will just stop working, or will move someplace that has lower taxes. You'd think that if the latter were true that there'd be a huge exodus from western Europe to the US over the past 50 years. And you'd wonder how it is that people can just "stop working" unless they're already filthy rich. But that's the argument.

I most recently encountered "class warfare" on the cover of one of our local weeklies, but since said newspaper is dedicated mostly to bashing the mayor for no particularly discernible reason, I tend not to read beyond the cover.

[etb]

You'd think that if the latter were true that there'd be a huge exodus from western Europe to the US over the past 50 years.

I don't think so; there are plenty of reasons (cultural, linguistic, nationalistic) why Western Europeans wouldn't want to just up and move to the US. You might be able to make the point with English Canada and the US, though.

[asrabkin]

The usual claim is two-fold.

First, that if you increase marginal tax rates, this will encourage high-productivity rich people to retire early, or work less. Think doctors and lawyers and such. Where they might work that extra 5 hours a week in exchange for $300 after tax, but not $200 after tax.

Second, that as you raise marginal tax rates, people will spend more efforts sheltering their income from taxation, rather than working productively. It's not that the taxes make them less greedy, it's that the taxes make them greedy in ways that are less socially beneficial.

[juli]

It seems to me that only claim #2 has any even theoretical merit, since there are other people who are willing to earn the money the rich people would discard in #1, and that even if those people are not mega-rich and so the government is going to get less of a cut of that money, that's probably not really a net loss to society. What, exactly, is the harm?

[anemone.livejournal.com]

I'd guess the argument would be that if they don't make that $200 or $300, they can't spend it on hamburgers at McDonalds, so there are less McDonalds employees, and so fewer jobs.

[juli]

I don't think that's actually the argument at the levels we're talking about. We're talking about money whose benefit to society would have been in its taxation, investment or charitable donation, not walking-around money.

[anemone.livejournal.com]

Well, home improvement money, then. You can spend vast quantities of money on making your house prettier.

[juli]

And, my experience has been, rich people who can work to perform such a task will do so, rather than dipping into cash reserves or, worse, cashing out investments. Having a lower net earning rate isn't ever worse than messing with investments. Unless the person is disinclined to work anyway, in which case I doubt they need an excuse. People who want money for something specific generally go for it. People who make money they don't need generally stash it away or use it to offset gains elsewhere (i.e. charity), rather than finding uses for it.

[sethg]

Rich people save/invest a larger proportion of their income than poor people. So if you took that $200 or $300 from a millionaire and gave it to someone making minimum wage, more money would be circulating through the economy.

[asrabkin]

The harm is that each time an expert doctor that decides to play golf, or each time a skilled programmer decides to work less, this decreases the supply of their services. And this will decrease the net quantity of labor of that kind supplied to society.

[tim]

But who's to say that the value of services supported by taxation (for example, public education, to create more great doctors and programmers, some of whom may be motivated by love for their work rather than money) is less than the value of services that may be withheld by greedy professionals? It seems to be that this argument doesn't work unless you accept that income determines a person's value to society.

[asrabkin]

I don't see why the argument makes any assumption that income determines value. The argument is that we're foregoing some real value when high-income workers work less, because there's some quantum of productive work that they could have done, and didn't.

I agree that government revenue is also potentially useful to society, depending on what it's spent on.

But I don't know how to quantify or measure "value to society." Absent some way of actually quantifying, measuring, or even describing what the opportunity costs are on both sides, I don't see any way to meaningfully discuss which cost is bigger.

[juli]

Value to society, I think, doesn't necessarily need quantified. Indeed, that it can't may be a useful point of argument. "We can't determine whether rich people working another half hour a week help society at all, let alone in which amount, and rather than putting our faith in an unknowable black box, we will risk that in favor of something knowable, like feeding starving people or saving lives."

[sethg]

Why would the doctor respond to the higher taxes by playing golf and not by negotiating for a higher pre-tax income? (What proportion of health-care expenditures in the US actually ends up as doctors’ taxable income?)

And given that a lot of consumer spending in the upper income brackets is “keeping up with the Joneses” (if all my neighbors and fellow-doctors drive Beemers, I would feel inadequate if I drove a Mazda), if the after-tax income of an entire economic class shrank at once, would anyone really have that much incentive to drop out of the work force?

[sethg]

Matthew Yglesias once observed that this argument would be a lot more compelling if the people at the very top of the income scale were, say, brain surgeons. OK, if the supply curve for brain surgeons moves down a bit, some of the top brain surgeons would retire sooner, etc.; some people who would really benefit from a top brain surgeon would have to settle for a second-tier surgeon, people who need a second-tier brain surgeon might have to wait longer for one to be available, etc.; we could then talk about whether this sort of social cost makes up for the benefit of whatever higher taxes are paying for.

But in the real United States, the people at the tippy top of the income scale work in finance. If investment bankers are suddenly faced with a marginal income that amounts to $3500/hour after taxes instead of $4000/hour, they’ll... what? Do such a sloppy job of banking that their employers are on the hook for billions of dollars in bad debt that the government has to cover lest the whole financial system collapse?

[anemone.livejournal.com]

Rich people have been waging war on everyone else since, oh, whenever it was that some people started being rich. (In fact, that's how you get rich in the first place.)

I'll give you the first sentence, but do you really believe the parenthetical comment? In order to get rich (or, let's say, moderately well-off) starting from poor, you generally have to do something out of the common way. Sometimes this something is highway robbery or fraud, but often it is providing a good or service. If you start out poor, you're working against the rich establishment, and you have to be substantially better than the establishment to succeed. Doing better at providing people goods and services is a net benefit to society, or so I'd think.

[tim]

I don't mean "how you get to be not-poor", I mean seriously *rich*... as in rich enough that you really do have reason to worry about tax hikes.

[asrabkin]

I think it's easy to get rich enough to worry about tax hikes, without making war on the poor. It's easy to imagine two married MDs each making over $250k per year, and that's your half a mill of income. Similar comments apply to lawyers, most of whom are doing a useful and non-abusive job. It isn't even unthinkably much money for a successful author, celebrity professor, etc.

[etb]

I think it's easy to get rich enough to worry about tax hikes

That wouldn't justify caring. A 2-point increase on $250K is $5,000 more in taxes. Now $5,000 is real money to me, but to someone making $250K it should be marginal noise.

Similar comments apply to lawyers, most of whom are doing a useful and non-abusive job

...though the more useful and non-abusive their particular job, the less money they make, as a rule.

[anemone.livejournal.com]

Now $5,000 is real money to me, but to someone making $250K it should be marginal noise.

Suppose you have a dual income household with kids, where one person earns $$$$ and the other person earns substantially less (say is a school teacher), it doesn't end up being marginal noise in the low-earner's salary.

The school teacher's salary is largely eaten by taxes, childcare, and expenses. For example, suppose the salary is $50,000 year, which means at 35% tax rate, the teacher takes home 32,000. (If the teacher were not married, there'd be deduction and stuff so the effective tax rate would be lower, but as the second salary, those are already taken.) Now, childcare is, say, $24,000 (two small kids--I pay $315/week for my daughter, figure two kids, 3/4 of the year), so a year's worth of work is only making $8000. A two point change in the marginal tax rate makes a $1000 change in the value of that second worker's after-tax income, and when that yearly income after expenses is $8000, that's a big deal.

I'm not sure this is a notable effect, though. I don't know how many households are like this (though I don't believe it's that uncommon for one wage earner to make much more than another), and second, some people work for reasons that have little to do with money.

[tim]

Wait, 35% taxes on a $50K salary? In 2009, the tax rate for a single person with that income was 17%.

Also, I don't think someone who makes that amount of money would pay $1200/month for child care; after all, that's more than some people's salaries.

[anemone.livejournal.com]

Wait, 35% taxes on a $50K salary? In 2009, the tax rate for a single person with that income was 17%.

Sorry, I said dual-income, but what I really meant was married. The situation I'm imagining is a married couple with kids, where one makes $$$$ and one makes $. I know a fair number of these couples.

In that case, the decision is whether the $-earner should work at all, so it makes sense for the family to compare assume the $$$$-earner works, and then compare total income from $-earner also works vs the case where the $-earner stays at home. My argument does not apply if you're considering a single earner making $50,000 year, for the tax rate reason (and such a person would pay well under %17 percent in total tax, even if the marginal tax rate is 17%).

As far as my childcare numbers being realistic, yes and no.
(1) Yes, it is. A married couple earning $$$$ jointly is probably going to spring for licensed daycare. My number isn't crazy-high for NY for that. A friend of mine paid twice what I do.
(2) No, it isn't, because my numbers were a little high (licensed day care in NY for a toddler is more expensive than a home daycare for an older child, and once kids are in school, it gets cheaper). But we're still talking a big chunk, and I intentionally made my teacher salary high, so the percentages in terms of salary probably work out.
(3) No, it isn't realistic, because low-earners who cannot afford childcare can often use relatives or friends for relatively cheap care. I didn't include this because I'm specifically looking a couple with one high earner, and those couples probably aren't going to be able to get grandma to be a regular babysitter.

[etb]

If it's not crazy-high for NY, it might still be crazy-high for most of the US, I'm guessing. (Tim didn't mention it, but I'm pretty sure his post was inspired by an Oregon ballot measure.)

[anemone.livejournal.com]

It's definitely higher here than other places, and maybe you could say that it's crazy-high compared to other places. (And my NYC friend's daycare was double(!) mine.) But I also suspect salaries are higher here, even for (relatively) low-wage workers like teachers.

And also, even if my numbers are wrong, the fact remains that unless you get a family or friend to provide care, childcare is expensive enough that some people cannot afford to work. (My SIL loses money if she has to pay for childcare.)

[etb]

The school teacher's salary is largely eaten by taxes, childcare, and expenses.

Why are you allocating all the childcare costs to the schoolteacher's income? If it's because the household wouldn't need childcare if the teacher stayed at home, well, they wouldn't need childcare if the spouse earning $$$$ stayed at home, either.

[etb]

Also, if we want to try to give each spouse some "share" of tax (and I'm not sure that actually makes any sense; the government* taxes them as a unit), why do it proportionally? After all, if the teacher were single, they'd be in a lower bracket and would pay disproportionately less tax. It's the $$$$-spouse who brought almost all the taxes down on them, so why not assign almost all the taxes to that person's income?

* If we're talking about the US. Canada allows spouses to trade income and deductions to some extent, but there's no such thing as filing jointly.

[anemone.livejournal.com]

I am talking about the US. Even in the US, this argument doesn't apply when we aren't talking married filers.

Most families with a $$$$-earner and a $-earner and two kids aren't going to consider the $$$$-earner becoming a stay-at-home parent and living off the $-earner's salary. That'd require a radical lifestyle change (moving out of the house, possibly to a different area of the country, their kids would be in a worse school district, etc).

What they are more likely to consider is whether the $-earner should work at all, so that's how I looked the issue. That is, I compared how much total money the married couple takes home when both $$$$-earner and $-earner work, vs how much total money the family takes in when $$$$-earner works and $-earner watches kids at home. How big that gap is will likely affect whether the $-earner makes the decision to work or not.

[anemone.livejournal.com]

The point is that Tim didn't ask a generic fairness question (in which case assigning the tax as I did would be silly), he asked specifically "how would changing the marginal tax rate on rich people change their behavior?"

[tim]

I deliberately said "rich enough that you really do have reason to worry..." and not "rich enough to worry..." Like etb said, $5000 to someone making $250K shouldn't be cause for insomnia. By the time you're into the territory where tax hikes could take a *serious* chunk out of you're income, you're into the territory where you're either stealing from the poor or building on the work of others who did the same.

People who would never have a chance of paying it worried about the inheritance tax, too, but that doesn't mean it affected them.

[asrabkin]

By the way, have you read much Machiavelli? He has a lot to say about conflict between the rich and the poor in his Discourses on Livy.

[flexibeast]

The rest of it is just class self-defense.

An oft-overlooked point - well said!

[ewx]

The theory here is that the City high earners will decamp to Switzerland if taxed much more, with the observations that many of them are immigrants in the first place, and that you can run a hedge fund from pretty much anywhere, used as support. Since taxes have recently gone up we may get to test the proposition.

[sethg]

One thing that’s under-emphasized in this kind of discussion is that as long as the government is spending more than it takes in, we’re just trading lower taxes now for higher taxes later. This may be the right thing to do in the short run—<include keynes-general-theory.h>—but I’m not sure it can be sustained indefinitely. Also note that about 10% of government spending is interest payments on the national debt, and the vast majority of the people (or institutions) that hold that debt are not exactly poor.