Tax the Rich?
Sep 18th, 2007 by Afiya
September 17, 2007
Okay, let me start out by saying that Economics is a subject I know little about. All I have to go off of here is common sense, so this post is more of a question than a statement. But I wanted to bring up and question a conservative principle that I have heard for some time and always thought was fallacious.
I was reminded of all this after reading an article which talked about yet another loophole which allows wealthy people to reduce their tax burden to a point lower than many in the middle class have to pay.
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The conservative argument is: taxes on wealthy people should be low because if you raise them, people will have less motivation to make money. This argument is based upon the Laffer Curve, which in basic principle is a respectable argument–if taxes are set at 0% or 100%, then the government collects nothing (at 100% no one has any incentive to work). Somewhere in between is the optimum taxation rate.
The problem is, it is not as simple a curve as it is expressed at right, especially in a progressive tax system. For example, let’s say you tax a $50,000 salary 20% so the earner takes home $40,000, and you tax a $1,000,000 salary 96%, so the earner takes home $40,000, the return on the greater salary is zero, giving one no incentive to earn more. Such effects don’t fit so neatly on the curve. And when you get out of the extremes, other variables creep so strongly into the equation that it collapses into the snarl seen below Laffer’s curve at right, as illustrated by Martin Gardner.
The argument I am referring to never actually applies to extremes as high as 90%+; while such brackets may have existed in the past, current discussion centers on whether such brackets should be in the 15~50% range. And as Gardner points out, within that range, Laffer’s curve fails to serve as an accurate predictor.
First of all, taxes are never as simple as conservatives portray them in public discussion. You often hear about how people “pay” the top tax amount. However, the top earners never pay 35%, the top bracket today. There is a difference between tax brackets and net taxes paid. People talk about the 35% tax rate, but that doesn’t mean that every dollar of your income is taxed at 35%. You get the first chunk tax-free (deductions), then the next chunk is taxed at 10%, then the next chunk gets taxed at 15%, and so on. And then we have other loopholes, shelters, and dodges, like capital gains tax, which tops out at 15%; a lot of wealthy people make huge portions of their income this way.
But let’s ignore all that for now, and simply focus on the principle itself.
Let’s say that I propose raising taxes so that a person earning more than a million dollars would pay half of their whole income in taxes.
According to the conservative argument, many people would throw up their hands, say “what’s the use?” and not work so hard to make more money. As a result, incomes would drop, and therefore tax revenues would drop.
Somehow I just don’t buy this. I don’t think that people give up money so easily just because they’re not making a bit more more money.
Let’s say that you make $2 million a year and you have, say, 30% taken away in taxes, so you come home with $1.4 million. Then I raise your taxes to 50%; at the 50% tax level, if you make $2 million, then you take home $1 million. You don’t like that, but let’s say you can’t avoid it. Your only choice is to work less or to work more. Will you really be tempted to cut your work levels so that you make $1.8 million and take home $900,000 instead?
I strongly doubt that. Or, if you do, then I think the cause is not the 50% tax bracket, but the desire for less work–that cutting a certain portion of the workload would result in less stress, more free time, etc. Under such circumstances, the same person would likely cut their work levels if the tax rate were zero–the motivation to work less is linked to the desire for free time, not because they get a smaller return than in some other imaginary situation.
After all, people get taxed today, and yet they still work their asses off to make a fortune, or make more of a fortune. Why aren’t more people saying, “Hey, I could be making millions more, but the government takes so much–I could get loads more if the tax rate were half what it is now, so why should I work this hard?”
In fact, I would argue that the motivation factor works in the exact opposite direction to what conservatives argue. And this is my central argument: People who make large incomes are usually highly motivated to make more money. They will not be motivated to make less if the tax rates are higher–if anything, they will be motivated to make more money in order to make up for the loss to taxes.
Think about it. Will you really give up on the chance to make an extra million dollars if the take-home is $500,000 instead of $800,000? You would really deny yourself half a million dollars just because taxes ate up $300,000? Or would you say, “damn the government for eating up that $300,000, but I want/need that $800,000,” and try to find a way to get more?
Then there is the fact that people who make that much money–that is to say, more than they need to live comfortably–tend to be motivated by the desire to make as much money as they can, to succeed as much as they can; these people are the ones who will work even harder should tax rates rise.
There is a threshold at work where at some point, higher taxes start to be counter-productive, and to be certain, it starts at a lot lower than 96%. However, I am pretty sure that it also starts at a lot higher than 35%–today’s top bracket, which means actual tax percentages are a lot lower.
Query for information: is there any resource which lists the actual average tax payments as a percent of total income based on income levels? Say, a list which shows what percent of total income an American taxpayer shells out when making $50,000, $100,000, $500,000, $1 million, and so on? Not just straight-out, assuming standard income only and no application of loopholes or other dodges, but a real-world view? As far as I can tell, that doesn’t exist.I would think that for any informed debate on tax levels, such a chart would be essential, and well worth the effort it would take to research and calculate it. Which makes me wonder why there might not be one.
