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To Spite One’s Face

September 22nd, 2011

It’s about time that we started publicly tearing down the asinine idea that raising taxes on wealthy people will be a drag on the economy, based on the idea that people who are taxed more will be less productive. Frankly, that’s a steaming, heaping pile of nonsense.

The basic premise behind it is that the more you tax people, the less they will be willing to work. For example, if someone makes ten million dollars a year, and you raise his tax rate from (let’s imagine that anyone really pays the marginal rate) 35% to 45%, meaning that (again, fantasizing that there are no breaks or shelters and that every dollar of income is taxed that much) his take-home drops from $6.5 million to $5.5 million, then this hypothetical person, seeing a million dollars vanish, will feel less like working. His productivity will fall, and as a result, the government will take in less in taxes overall, and the economy will slow from all the people like him making similar decisions, and no one will want to pick up the slack.

This is about the stupidest thing I have ever heard, right up there with the Laffer curve. Yes, if you raise his total tax burden to an absolute 95% (no loopholes, breaks, or shelters) if he makes $10 million, and lower it to 10% if he makes half a million, then yes, probably you’ll find people who will draw down and go for the lesser amount. But only with such extremes, and only in such stark terms, without room to maneuver. However, those extremes do not and will not exist. The top marginal rate of 35% kicks in at just under $380,000, and the 33% rate at just under $175,000 (for someone filing as single). The savings in terms of total percent are gradual until you get to the bottom of the 25% bracket at just under $35,000. What this means is that there are no huge savings for a wealthy person in lowering their income, and will not be unless the tax brackets are very poorly designed indeed.

If a wealthy person now facing a 35% marginal rate sees that rate raised by 10%, or even 20% or 30% more, they are not going to scale back the amount they work and try to earn. Not unless they have some bizarre, neurotic impulse to shoot themselves in the foot out of resentment over being, in their opinion, taxed too much. Many will feel over-taxed, but few if any will see that as reason enough to stop trying to make money. Quite the contrary, in fact–it is far more likely that such a person would actually increase their efforts, as most such people aim at achieving specific levels of wealth, achievement, or overall success, and not at just slightly more advantageous relative rates of take-home pay. This would make no sense in the real world. A CEO who declared he’d scale back his work hours and not perform as well for the company because his top marginal rate rose from 35% to 40% would probably be fired, and rightly so.

A Randian thinker, however, might suggest that “productive” people (because people who do back-breaking labor at minimum wage are not the productive ones, I suppose) would go on strike in protest to such horrific tax rates. This, of course, is stupid piled on stupid. If there are two scabs waiting to pick up the work of every menial laborer, then there are a hundred hungry businessmen with no sense of class solidarity whatsoever who are just salivating to get the chance to fill in the void that would be left by a businessman idiotic enough to throw in the towel. If there are people in Southeast Asia willing to do the same factory work as Americans for a tenth of the pay, then there are a hundred times more eager entrepreneurs who would give anything to take home 55% of several million dollars per year.

This stream of replacements wanting to make money off of a business venture would not dry up even in the extreme 95%-absolute-rate fantasy. Think about it: there are people who work 80 hours a week scrubbing floors for minimum wage. Do you think such a person would back away from a chance to bring home half a million dollars out of an income of $10 million, working the same hours but in a business suit in a nice, clean office? And don’t tell me that you won’t find hungry, creative, productive people in large supply; productive people are clobbered every day in business by simple competition; lessen that competition and they will emerge.

No, no businessman will call it quits because of higher tax rates unless they had achieved their goal and sated their desire for wealth already, and if such rare people were to retire, there would be no end to other people–creative, productive people–who would immediately pick up the slack.

  1. Troy
    September 22nd, 2011 at 11:18 | #1

    Well-written.

    Another angle is that much of the rich’s income comes from rents, both economic rents and actual physical land rents.

    Rents are ALWAYS the best — or, in Milton Friedman’s words, least worst — thing to tax, since they exist whether or not the government taxes them.

    Michael Hudson made the point that the original income tax — with its initial $120,000 standard deduction — targeted “unearned income”:

    http://michael-hudson.com/2011/01/why-america-had-a-90-income-tax/

    Today, with our current income disparity:

    1 person gets 💰💰💰
    19 people share 💰💰💰💰💰💰

  2. SOUSA-POZA
    October 2nd, 2011 at 00:02 | #2

    It is more than an asnine idea: it goes against the second law of thermodynamics.

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