I think your flaw in this logic is either intentionally or unknowingly excluding the fact that there is no alternative to the behavior (labor for income) being taxed. An income tax is a disincentive to work only if there is some alternative to work to provide income, which is not the case for the vast majority of the US. It’s an extreme example, but even if all income was taxed at 90%, people would still work because there is no other choice if one is to survive or provide for a family.
Yes, there is an alternative. Quite obviously.
The usual alternative is not working the same hours, as I have already explicitly mentioned. But it does go further.
As the title of this thread indicates, 47% of US citizens don’t pay any federal income tax.
These people are obviously not subject to the disincentive effect from income taxation, because they don’t pay the income tax in the first place.
Of course, it goes deeper than that. I will readily grant that any new income tax suddenly and cruelly imposed on the lowest earners would have a negligible disincentive effect as far as their effort to live. But they still have options available beyond labor income. It’s just that all of the options are terrible. If the government squeezes them even more than life has already done, they will do what they can to support themselves – in criminal enterprises, non-taxed black markets, outright revolution, or whatever else they can find.
Human beings aren’t little drones that follow any new tax law to the letter. If the game is rigged, we have the choice to stop playing.
But in normal conversation, when we’re talking about the disincentive effect of income taxation, we’re talking about the everyday situations of people who actually pay those taxes. We are not generally discussing a hypothetical world where all tax rates are 90%, which is so high that the government could actually increase its overall tax revenue by lowering the rate in order to legitimize and tax the formerly black market trade. Hypotheticals can be useful, but in our particular case, a discussion of how regular income-tax-paying people respond to plausible changes in their tax rate is not furthered by the extreme example.
While I think the maximum rate for income taxes may be similar (after the recent increase) the more important rate for the rich is the capital gains tax. That was about 29% until 1997, and is 15.35% today. Cite. Clearly the higher rate did not kill investment. That’s why hedge fund managers want their income considered as capital gains. Many CEOs make very little in salary - but they get lots of options. So the effective marginal rate for the rich is a lot lower than it is for you and me.
Or the economy finally recovered. We’ve been through this - in the worst of the recession there were 8 candidates per job available. People not working then may not have been able to find anything - especially those with lower skill sets.
During that time my company, while it didn’t lay anyone off, also didn’t hire. A pity, since we could have gotten people cheaply. Now we are, but we’re competing with Google and have to pay a fortune. And have to work a lot harder than we would have back then. So it went for everyone.
I’d hope they get more from the state than they pay in taxes. So money is being redistributed from the wealthier - just like it should be.
First, I hope you agree that deflation is very bad. All I know is what I read in Krugman, but I believe the argument is that some small degree of inflation encourages people to buy now, before prices increase.
Here is an advantage of high inflation. I did salary administration in the mid-80s when inflation was very high and the average raise was around 10%. It was great. The reason why is that various factors, like starting salaries, meant that relative pay was often out of line with relative performance. A big bucket of money let us correct some of that far faster than we could when raises were 1 - 2%. I’m not arguing for very high inflation, but there are some benefits.
Spain did not have a deficit issue before the crisis - and they still got hammered, thanks to too much money coming in. I generally agree that deficits should be drastically reduced during times of prosperity. Today in the US we have prosperity for the rich and not so much for everyone else. Bush should have increased taxes and cut the deficit when the economy was good, and then there would have been a much better platform to fight the recession on. That’s pure Keynes. An increase in the capital gains rate might let us reduce the deficit, do some needed infrastructure work, and correct income inequality somewhat. Mitt can afford to pay a bit more.
I can skip over most of what you wrote since I’m not arguing that the future will be awful. I’m arguing that a consumption tax applied will slow growth as compared to the present situation, with perhaps some reforms.
Here is the argument you used with nate.
- Taxation is a disincentive to the behavior being taxed.
- An income tax is a tax on the productive work that created the income.
- An income tax is a disincentive to work.
If we substitute consumption for income, we get that a consumption tax is a disincentive to consume.
Now, if there were no income tax one might think that consumption would increase because of people having more money in their paychecks. Perhaps. But under your system people would actually have the same amount - assuming that withholding was somehow equally progressive in the consumption tax realm as it is in the income realm. It seems unlikely, unless you count investment as consumption.
Now here is the classic argument for cutting capital gains taxes and decreasing the highest incremental tax rates
Yet you don’t demonstrate why any rational business owner would invest in increased production without the expectation of a market for it. I say rational because that is exactly what happened during the Bubble - each company was predicting massive sales increases and built to meet these. When not all of them could sell more, we got left with tons of inventory which took years to work through. One of the reasons for the slow growth in investment after the recession was no doubt that people had been burned before.
The point is not that crashes are bad. It is that your assumption that increasing supply increases demand may not be realistic because businesses with be loath to increase supply.
Now your plan to apply the tax at the end of the year might decrease sticker shock - but people will soon learn that they get to keep even more of their money under your system than they would under the current system by just not buying.
I don’t think these things count as just details.
But you said it best - a consumption tax is a disincentive to consume.
Yes, and if they’d turn down a pay increase because it might get taxed, they’re as insane or stupid (or both) as Bill O’Reilly.
This “disincentive” doesn’t really have a viable alternative. The alternative you’re proposing is basically “drop income significantly” (or “become a criminal”, which we’ll disregard for now because that’s a solution to quite a few annoying problems in economics - kind of a cheat code, really, and we have PunkBuster). I hope you’ll excuse me for pointing out the obvious, but that usually comes with a quality-of-life reduction. “I’ll work less hours to avoid coming into the upper tax bracket!” Well congratulations, now you have even less money.
I seriously doubt that minor increases on the upper margin would have any significant effect on working hours.
I’ve spent a lot of time in the upper brackets and working with people in the upper brackets. I’ve never seen anyone turn down a raise or promotion because it would change their bracket. I’ve never seen anyone in any bracket experience a tax increase at any level and say “screw it, I’m not going to work” - nor have I ever seen the implied opposite - the tax rates go down and suddenly my staff all wants to work harder.
Moreover, there isn’t a lot of room at the upper brackets - and frankly there IS a lot of talent. It isn’t like executives retiring for tax purposes would leave us with a huge shortage of uber competitive MBAs looking to fill those spots. IF it would happen, it would be as much a solution to a problem (not enough top tier jobs for our best and brightest) as a problem itself.
I have seen people move to places to shelter their income. But the U.S. makes this very difficult for U.S. citizens - much more difficult than European countries. Even giving up your citizenship is not a get out of jail free card. U.S. States have a harder battle here and lots of retirees and wealthy people choose to live in states with low taxes - but a migration to the Caymans and not paying U.S. taxes isn’t easy. (Its not at all difficult for U.S. businesses).
The tax on marginal income is a disincentive for marginal work. It’s not so much a matter of working vs not working. It’s not about turning down raise. Working harder for more pay, taking a second job, a non-working spouse getting a job, or an older worker deciding to stop working all involve trade-offs. Most of us could earn more if we really wanted to. Most of us could retire just a little bit later.
Employment isn’t zero-sum, even at the top. There’s a reason many high-paid executives are high-paid. One of the start-ups I assisted ended up bringing in retiree as their CEO, and they’re damn lucky she just happened to be living nearby. Not everyone even has access to that talent. And they have to pay enough so that after substantial taxes, it’s worth her spending less time with her grandchildren.
Voyager, you asked a question that assumed your conclusion.
I pointed out that consumption actually goes up.
Then you go and again assume the exact same conclusion.
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Yet you don’t demonstrate why any rational business owner would invest in increased production without the expectation of a market for it.
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There is an expectation of a market. That graph I linked to didn’t change its shape overnight. It’s still going up.
That increasing consumption? It’s an ever-increasing market for goods. It attracts investment. As it slowly but visibly increases, the calculable ROI slowly increases. As technology improves from smart investments, the calculable ROI slowly increases. I’ve warned in this thread, many times, against the binary fallacy that keeps popping up: WORK or DON’T WORK. It’s not like that. Small changes here cause small changes there. It’s the same thing with INVEST or DON’T INVEST. It’s never a binary like that. It’s a spectrum that we slide along. Production in investment works its way slowly higher, and that investment spending is income for other people. That income from the investment spending today helps finance the consumption purchases of tomorrow that the investment helped create. And on and on.
The core of this idea is very simple, and it doesn’t change. I don’t have the 200-page treatise written that fills in all the math on this, but we don’t need the 10-season TV series to understand the short poem it’s based on. The story is the same.
Nobody has made any proposal about incomes dropping “significantly”.
I wouldn’t say that it’s solution. This is the opposite thingy. A new problem.
If the government taxes away all the legal income that people need to survive, they will obviously do other things to earn their living. That’s a pretty horrible “solution”. Thankfully, the US government doesn’t do this. The government transfers money to low-income workers in the form of things like the EITC, which is a sort of negative income tax. This is a vital program, and I strongly support it.
But the manner in which we raise money for important programs like this will have other undesirable effects. We should try to understand those effects, that we might mitigate them.
Yes, raising taxes on people does come with a quality-of-life reduction. That’s the entire point. People respond to this change of situation by subtly changing their choices.
Most people respond to an increase in their taxes by saying, well shit, I have less money but I guess I’ll keep doing exactly what I’ve been doing.
But along the margin, a group of people will respond to an increase in their taxes by saying, well shit, I have less money and this job works me too hard already. It’s not worth putting in this much effort anymore. I’m going to take a few less hours, or I’m going to do something else.
When we aggregate the data, we can actually notice this pressure on working hours. As I’ve said, this is not the whole story but it’s still part of the reason why Europeans work less than Americans on average.
Nobody has made the argument that minor increases on the upper margin will have a “significant” effect on working hours.
Minor increases on the upper margin will have a minor effect on taxable working hours. Larger increases on any relevant margin will have larger effects.
We have to look at the data if we want to see the apparent size of the effects given the margins on which real governments typically operate.
Our lives are not a random sample. Our experience is not going to be reliable enough to answer a question like this.
An anecdote is often worse than no data at all because our minds fall too easily into the trap of extrapolating from an unrepresentative experience. We need to cast our nets wider, and to think about choices on a spectrum instead of the binary decisions of people we happen to know. We need to actually look at the data. There is an introduction to this in a previous post in this thread.
Except that this cite is for 2009 and now there is an additional 3.8% Affordable Care Act tax. I really don’t understand trying to argue on forums without even having basic facts right.
Is it so hard to just look it up and see that this statement was indeed based on a report about households? http://www.taxpolicycenter.org/UploadedPDF/1001547-Why-No-Income-Tax.pdf
I am aware of that, however, when you do have an anecdotal sample size in the HUNDREDS that includes four Fortune 500 CEOs and have never seen anyone exhibit this behavior regarding taxation, you need to wonder if there is any validity to the assumption.
Does this really make sense to you though? It’s definitely not rational. An individual is working, has his pay cut by a tax increase, and then decides to make even less by working less hours? Why? And what else is he/she going to do? What’s the alternative?
It’s entirely rational. See daycare costs vs salary for the parent with the lower paycheck. See someone working overtime just over a tax bracket jump. Working has costs. Those costs can be monetary, temporal, emotional, etc.
Sorry should have been clearer. I means that the forecast after a major consumption tax would be for reduced consumption. We’re talking about the world you propose, not the current world, where consumption is indeed increasing, as in investment.
Unless you are saying that a major change to the tax structure will have no impact on habits. Or that taxing consumption will in some way increase it.
It is still much lower. Do you dispute that?
When we’re confronted with an apparent contradiction between
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the aggregate statistics which came from carefully selected samples out of populations of literally hundreds of millions of people over many years of observation, and
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our faulty human memory from our personal observations,
then we should rely on the formally collected data. The seductive lure of statistically biased personal experience is the precise reason why it’s such a dangerous trap for us to fall into. Better for us not to scent that bait in the first place. Too many of us are tempted to rely on our skewed “sample” than to look at the objectively gathered numbers.
Europe is the alternative.
I don’t know how many times I can write that. The European lifestyle of relatively more leisure and relatively less hours of taxable work is the alternative. Why is “being European” such a hard thing to accept? This is a condition that inflicts hundreds of millions of people worldwide, most of them in Europe. They seem to do okay with it. Just because you don’t agree with their decision doesn’t make them “irrational”. That’s not what irrational means.
When their labor was taxed relatively more heavily, they did relatively less taxable work. The European alternative is to spend more of their time in leisure activities. Chatting all day at street cafes, becoming mimes, or whatever. I have already posted the data on this. It’s right there, you just have to page up. Their per capita production/income is noticeably smaller than in the US. Why? It’s not just productivity. Their per capita income is lower because they work less. If average US income tax levels creep more toward European levels, we should expect a similar decline in work. Likely not to the European extent, though. The US doesn’t have the same safety net system which is also a factor in their work preferences.
Here we have expected utility again. If your retiree was living only on Social Security, she would not have any issues taking the job, even if her taxes increased. The retired CEO probably had lots of money saved up, which makes getting more from a job less important. I’m almost there. I got asked to stay until I’m 67, and turned them down flat because my freedom is worth a lot more.
I’m sure there are some marginal cases where increased taxes mean less work. But say some of those taxes went for childcare support. I bet you’d get far more hours worked as women found getting a job more useful if her wasn’t eaten up in childcare. You need to look at the entire economy.
Just more anecdotes, but I’ve been around lots of well paid engineers (not as well paid as your sample) and I’ve never seen one do anything based on taxes. The amount of work and the desire to change jobs is driven by social pressure and the work, not by taxes. During the bubble we got driven to a higher bracket - never heard anyone complain or eschew cashing in options to decrease the tax burden.
The problem with data, as I suspect you well know, is that correlation is not causation. In other words, your data may show a correlation between taxes and output (although I note that France has a higher output per hour than the U.S. in your data - and no one thinks French taxes are low. And Germany’s - also not known for low taxes, are practically, and I’d guess statistically, the same as the U.S. in per hour productivity).
You seem to want that data to say something I don’t think it says.