Conservatives Anonymous
Wednesday, December 02, 2009
Progressive Taxation and the Illogic of Duty
A hypothetical, using nice round numbers. Bob grosses $250,000 a year. Bob works 75 hours a week and forgets the names of his children. Bob lives in a state with a moderate burden of sales and income tax, so with a little creativity in his accounting his total tax burden amounts to roughly 40% of his salary, or $100,000. He is left with $150,000 to spend as he sees fit. Enter crusading politician. "In this time of skyrocketing deficits, the rich need to pay their fair share." Presto chango, Bob's total tax burden after his raised federal and state income taxes reaches 60%. Bob's spending power has declined to $100,000 and he contributes $150,000 to the local, state and federal tax coffers. Had Bob made less, say, $150,000 instead of $250,000, said politician's anger would have been limited and his tax burden would have been just 50%, leaving him with $75,000 of spending money and the various tax authorities with another $75,000. Let's say, hypothetically, that he could make that $150,000 while working 40-50 hours a week and having time to coach Little League. An additional $75,000 may be worth the extra hours and the abandonment of non-economic activities. An additional $25,000 may not be worth the extra effort (and this is to speak nothing of those on the margins of different tax brackets, who may net more by grossing less). Bob decides against the additional work, and both he and the tax collector are poorer relative to the original state of affairs. This is the essence of the Laffer Curve, namely that steeply progressive taxation incentivizes evasion and disincentivizes the earning of additional income, with the perverse consequence of causing a decrease in tax revenue.
(Author's note: I'm not attempting to argue for the validity of the Laffer curve in all it's glory; indeed I think Arthur Laffer and John Maynard Keynes were the two most destructive economists of the Twentieth Century for they preached that people could have something for nothing. In limited circumstances and in the hands of people who understood the doctrine and the math this was correct, but in the hands of simpletons and the economically illiterate their respective theorems begot fiscal incontinence.)
Said politician is not immune to this obvious economic truth, even if he has little recollection of the 1970's. Progressive taxation as a means of raising revenue is predicated on the presumption that the rich man believes it his duty to sustain the pace of his work, even in the face of obvious economic disincentives to do so. Of course politics aside few if any hardworking rich men believe this to be the case. They may labor for reasons other than money, for the building of a business or professional satisfaction or for myriad personal motivations. But the abiding motivation is to earn money, and when that motivation is removed he will limit his efforts and establish a new balance between the pursuit of wealth and the non-economic activities that he limited or abandoned in his previous pursuit of wealth.
A hypothetical, using nice round numbers. Bob grosses $250,000 a year. Bob works 75 hours a week and forgets the names of his children. Bob lives in a state with a moderate burden of sales and income tax, so with a little creativity in his accounting his total tax burden amounts to roughly 40% of his salary, or $100,000. He is left with $150,000 to spend as he sees fit. Enter crusading politician. "In this time of skyrocketing deficits, the rich need to pay their fair share." Presto chango, Bob's total tax burden after his raised federal and state income taxes reaches 60%. Bob's spending power has declined to $100,000 and he contributes $150,000 to the local, state and federal tax coffers. Had Bob made less, say, $150,000 instead of $250,000, said politician's anger would have been limited and his tax burden would have been just 50%, leaving him with $75,000 of spending money and the various tax authorities with another $75,000. Let's say, hypothetically, that he could make that $150,000 while working 40-50 hours a week and having time to coach Little League. An additional $75,000 may be worth the extra hours and the abandonment of non-economic activities. An additional $25,000 may not be worth the extra effort (and this is to speak nothing of those on the margins of different tax brackets, who may net more by grossing less). Bob decides against the additional work, and both he and the tax collector are poorer relative to the original state of affairs. This is the essence of the Laffer Curve, namely that steeply progressive taxation incentivizes evasion and disincentivizes the earning of additional income, with the perverse consequence of causing a decrease in tax revenue.
(Author's note: I'm not attempting to argue for the validity of the Laffer curve in all it's glory; indeed I think Arthur Laffer and John Maynard Keynes were the two most destructive economists of the Twentieth Century for they preached that people could have something for nothing. In limited circumstances and in the hands of people who understood the doctrine and the math this was correct, but in the hands of simpletons and the economically illiterate their respective theorems begot fiscal incontinence.)
Said politician is not immune to this obvious economic truth, even if he has little recollection of the 1970's. Progressive taxation as a means of raising revenue is predicated on the presumption that the rich man believes it his duty to sustain the pace of his work, even in the face of obvious economic disincentives to do so. Of course politics aside few if any hardworking rich men believe this to be the case. They may labor for reasons other than money, for the building of a business or professional satisfaction or for myriad personal motivations. But the abiding motivation is to earn money, and when that motivation is removed he will limit his efforts and establish a new balance between the pursuit of wealth and the non-economic activities that he limited or abandoned in his previous pursuit of wealth.
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