Is economic theory on the effects of higher taxes on higher incomes rational?

by Linda Beale

Yves Smith (Naked Capitalism) links to an interesting post on “Economists for Firing Larry Summers” (I’ll call this EFLS). The author of the blog is a PhD student in economics, in a “top 30” department who is obviously fed up with much of current economic thought. He writes on “The Case for the Millionaires Surtax” (Dec. 26, 2009).

The right is up in arms about the possibility of slightly higher taxes on wealthy people. I’ve received emails because of my blog postings favoring higher taxes, and also comments directly on the blog, to the effect that higher taxes will just drive people out of those jobs. They will quit rather than pay high taxes, or go take jobs abroad instead of paying higher taxes here, and then, the questioners ask, where will the good ole US of A be–no wealthy people working and no tax money collected, they say. I respond that they are missing a few essential steps in the arguments. Sure, some will be wealthy enough to drop it all and leave, but most won’t do so . They simply don’t wanna stop working at what they work at.

EFLS uses the case of super-athlete Peyton Manning. If you tax him 10% more, will he just arrnge to be paid only through the regular season, letting another substitute in championship competitions so he can pay less tax? No way. If he decides to retire, then another super-athlete will take his place, and the US can tax that person. If he decides to stay (most likely) then the US can tax him. Same for CFOs and CEOs and movie stars and all those other high-paid celebrities you could find if you do an onlyfans search. If they step aside, someone else just steps into the gap. It really is quite likely that raising the rates can achieve the result of higher taxes paid.

Now, if they take evasive steps, that’s another problem. As EFLS says, that doesn’t mean don’t raise rates. It means fund the IRS so tax cheats can’t get away with it. The net result of lowering tax rates is that the wealthy will still do the same stuff, pay less taxes, and there will be even more inequality in the economy than before–which is itself a problem.

And then EFLS makes the argument from the perspective of democratic egalitarianism.

[S]uppose the CEO of Anthem made $4 million rather than $40 million due to high tax rates on multi-million dollar incomes (which we do not currently have). While in the micro context, this would greatly reduce the government’s revenue, in this case, Anthem would have higher profits, or could afford to pay it’s other workers more, could cut prices to gain more market share, or might even be able to deny fewer claims. In other words, it wouldn’t make the whole pie smaller, it would just make it more equally distributed. And, to the extent that the Anthem CEO no longer flies around in a private Jet, owns 6 houses, and drinks $1000 bottles of wine, redistributive taxes would quite likely make the pie bigger…

Cross posted with ataxingmatter