What if we had a 95 percent marginal tax rate on income over $10 million? What dire consequences would flow from this? Perhaps a certain outflow of top-flight baseball talent to Japan. But I don’t see this leading to any kind of economic calamity. Producers of certain classes of supply-constrained luxury goods would lose out as their prices go down. But my strong suspicion is that at the end of the day most of the super-rich would ultimately find it a relief to get off the treadmill of status-competition and the not-quite-so-rich would be thrilled to see their betters cut down to size.
I’m prepared to be talked out of this view if Brad DeLong or someone can really lay it out for me, but I don’t see it for myself. If anything a de facto cap on compensation would probably make firms better-managed.
OK look a 95% tax might be OK, but it is not acceptable to say that Brad DeLong is the only economist worthy of debating Matthew Yglesias (I mean the only one worth naming. I mean that shows disrespect for Paul Krugman himself).
I must object.
update: In 1936 J Maynard Keynes responded to M Yglesias
Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation — income tax and surtax and death duties — especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking,
Click the link to find Robert Waldmann making the same 2 arguments in the same order (but with many many more wasted words) in 2009. I promise I was not consciously following Keynes.
But first I note that another benefit is that a progressive tax punishes volatile income as in a huge bonus this year then no job because the firm is bankrupt next year. It increases risk aversion (by penalizing variance). This also means it penalizes short termism. Also a bit more risk aversion would have been nice no ?
I think the problem with 95% tax rates is not that they reduce incentives to work. I mean after the first 30 million or so, I don’t think that the point is having the money as opposed to getting the high score in the money game.
The problem is that they make tax avoidance schemes profitable. Fatcat CEOs play two games — who can get the most out of shareholders and who can pay the least to the IRS.
The second game is a total waste of time and energy.
update: Now I have a thought. Many tax avoidance schemes (not to mention tunnels that is semi legal embezzlement schemes) require fat cat managers to also be in business on their own account (for example owning a firm that owns a structure and subtracting depreciation so the firm has negative profits and then a huge capital gain when the structure, which hasn’t really depreciated, is sold). How about conflict of interest rules for the top 5 officer of publicly traded corporations which require them to have no other income other than compensation from the corporation and Tresury security interest on their wealth ? I’d say that eliminating conflict of interest is a worthy goal in itself *and* that this would make tax avoidance very difficult.
Another problem is that we really like start up entrepreneur types who take huge risks. They are motivated partly by the hope of huge rewards. They are probably about as rational as the average lottery ticket buyer, but their crazy optimism is socially useful. I wouldn’t want to tax their winnings over 1,000,000 at 95% (for one thing they would otherwise reinvest them in their promising but liquidity constrained firms).
So tax the hell out of way overpaid employees, but leave super successful small (but getting big fast) businessmen alone ? Uh Uh, I’d guess that the fat cats will redefine themselves as freelance management consultants.
The problem with taxing at 95% is that defining the tax so that it doesn’t have loopholes is impossible (if a loophole is worth millions per year per client lawyers will find one).
So, in the end, I’d support at 75% tax, but 95% seems a bit too high.