Not everybody - just those who will maximize their happiness by working less. And since we are not at full employment, people who would increase their happiness by working more will get the chance to.
If employers want people to work longer, they’ll need to pay enough to make it worth their while.
Companies will have to pay more, but since almost all of the salary increases since the end of the recession have gone to the executives and the investor class, they can afford to.
Isn’t this the “Lump of Labor” fallacy?
Seems to me before you can say what someone ought to pay you need to see what they are paying. Income tax is just one tax of many. Some are progressive, some are regressive.
In the final balance it turns out that most people in this country, when all is tallied up, pay about the same effective tax rate when you add up all taxes they pay (property tax, sales tax, liquor tax, etc).
(That graphic came from here: Why are State Taxes Less Progressive? - The Atlantic)
No. First I’m assume that we’re not at full employment, so that the amount of labor worked can increase. Second, I’ve said elsewhere but not here that this will lead to more consumption and thus to the need for more labor.
If those working extra hours at the beginning were spending all they made on consumption it wouldn’t work, since the increase and decrease in consumption would balance out. But that is not likely to be correct. In other words, making the guy working two jobs to barely make ends meet cut his hours won’t help the economy at all.
Forest for the trees, Nava. Things naturally are going to be a little weird in a country mired in 20%+ unemployment. It doesn’t change the underlying idea.
The Prescott paper I cited shows strongly elastic results, but it’s true that a lot of the empirical evidence suggests that labor supply is more inelastic (less responsive to these sorts of changes) most especially for men. I’m comfortable with a conclusion that the effect is weaker than that specific paper indicates. It’s definitely on the edge of the empirical literature. I thought it was useful precisely because it was a simple GQ sort of explanation, and then people accused me of oversimplicity instead of actually reading my posts.
Where I draw the line is with the ridiculous claims that there would be zero effect, that real human beings can be moved around like pieces on a chessboard without responding at all. That is simply stupid, and that’s been my primary issue in this thread.
To take just one extreme example, we can look at the French marginal rate of 75% that will expire shortly. The tax took in about 260 million euros in its first year, and then 160 million in its second (Yahoo business). When taxable income is taxed, people withdraw that taxable income. That’s an extreme example based largely on manipulating income, but the whole point of looking at extreme effects is to get a handle on what’s going on so that we can adjust it to a smaller scale to understand what happens in other more common contexts. The effect gets smaller at smaller rates, but it does not disappear.
We could even go further than that. Some can make a theoretical argument that in our effort to maintain a constant standard of living, people might actually work harder. There’s nothing illogical about that argument which has shown up in this thread. (You can find it in labor econ textbooks, the backward-bending supply curve where the income effect outweighs the substitution effect.) But at that point, people have to actually make an empirical case for that… and no one in this thread has tried to do anything of the sort. People somehow believe that as long as they come up some reason, any reason, why the conclusion might not hold, then they’ve done their job. A couple hypothetical counterexamples inside their head outweigh any cite.
That’s not how it works.
The effect exists. It’s possibly inelastic, but inelastic does not mean non-existent. It just means small. Gravel thinks it’s small (pdf): “This small response appears to reflect both income and substitution elasticities that are small, so that even if a tax change substantially lowers marginal relative to average rates (the first affecting substitution and the second affecting income), the response would be small.” Or this response to Prescott’s paper (pdf): “Our punch line is that Europeans today work much less than Americans because of the policies of the unions in the 1970s, 1980s, and part of the 1990s and because of labor market regulations. Marginal tax rates may have also played a role, especially for women’s labor force participation, but our view is that in a hypothetical competitive labor market without unions and with limited regulation, these tax increases would not have affected hours as much.” They can’t summarily dismiss the tax effect, they’d just rather blame unions. I can add one more from Brookings (pdf): “The positive effects of tax rate cutson the size of the economy arise because lower tax rates raise the after-tax reward to working, saving, and investing. These higher after-tax rewards induce more work effort, saving, and investment through substitution effects.” That doesn’t attempt to separate substitution and income effects but it does provide another perspective on what I’m talking about.
You said in another post you didn’t quite know what I’m saying. What I’m saying is very simple: This effect exists. Small? Maybe so. But it exists and that’s something we have to acknowledge.
A random example does not negate the actual research of economists.
Standard economic theory isn’t “illogical” simply because someone dislikes it.
The existence of social insurance probably is a factor. So are taxes. Methane in the atmosphere has a warming effect. So does carbon dioxide. Listing other effects does not make the first effect go away.
You’re essentially arguing the existence of the “income effect”. And sure, it exists.
You’re not acknowledging the “substitution effect”, which means you are making the implicit assertion that the income effect outweighs the substitution effect, and you’re doing so based on your own gut feeling and nothing more. I showed up in this thread with one cite because I was treating it as a miniature GQ question inside the GD thread. (Because it is.) I wasn’t expecting this ideological rigidity to the idea. My original cite was at the edges of the empirical work done on this, but it conveyed the idea simply which I thought would actually be an advantage for an impartial reader. I was mistaken.
My cites above in this post give a broader range of work, but even they acknowledge the tax effect. It’s possible that the income effect dominates for a subset of men (which is to say, it’s possible that a subset of men work harder when they’re taxed more), but it’s not generally true of men according to the data, and it’s overwhelmingly not true for women, although women’s labor market participation is more like men’s today than it was in the past.
Your chosen example might be directly contradictory to the point you’re trying to argue.
Incomes are higher on average in the US. The presence of offshoring gives US companies stronger incentive, compared to European companies, to offshore their jobs. Demand for US labor would be comparatively lower when it’s comparatively more expensive. If we were to take your idea into account, then we would have to treat whatever numbers we see as an understatement of the tax disincentive when comparing European and American stats.
If you want an example of labor demand that would mean an overstatement of the tax disincentive from any official numbers, we can look at one of my cites above in this post: if labor regulations are more strict in Europe – for example, more difficulty in firing workers which means more hesitance when hiring – then that would mean less demand for European labor compared to US labor. And that is, in fact, the point of their paper. They think unions and labor regulations are relatively more important than the tax effect. And that’s fine. That’s quite possibly a valid argument. What they don’t do is argue that the presence of methane gas means that carbon dioxide has zero effect.
If we’re going to explore actual demand-side differences, then we have to actually take the time to explore relevant demand-side differences. To do otherwise is just to throw random shit at the wall in the hope that something sticks.
It’s valid to be concerned people casting aspersions on good people who do not deserve it.
But it doesn’t affect the economics.
So.
Here’s my issue with all the hand-wringing that’s been going on in this thread: the main principle is obvious and indisputable in any other context. If the price of a good is higher, people will buy less of that good. That’s just the demand curve. Same principle, lots of data. If a consumption tax is about to rise, people will make major purchases right before the increase goes into effect to avoid getting burned by the higher rate. Same principle, lots of data. If a central bank announces a plan to weaken its currency by printing money in order to hit a new target, the currency will immediately weaken before any direct actions are taken by the central bank. Same principle, lots of data.
When you make something more “expensive” in any context, people shift away from it.
This should not even be a discussion. This is not a debate. It’s simply an unavoidable fact about human beings. We can be stupid, but we learn from mistakes and we adjust to our circumstances. Nobody sensible believes that economic equations are a perfect model of the human mind, but they’re not supposed to be. The point of those equations is this one principle: to consistently apply the fact that people will respond to new costs they are confronted with. That’s it. We shouldn’t ever forget about this effect, and a formal model forces us to keep it always in our minds so that we can’t pretend people are suddenly oblivious to the changes that happen around them. I’d argue this very thread is evidence for why it’s important to have formal models to remind us of simple ideas.
Income is a little weird. Sure. People might genuinely want to maintain a standard of living. But the underlying principle still doesn’t go away. People don’t stop being people when they’re pulling in taxable labor income. If taxable labor income becomes more expensive, there is a very real effect that will lead us to choose less of it. There are other things going on, and we have to look to the data, but income is not a magical fairytale exception to this. Labor economics has some interesting little wrinkles that I could get into in more detail, backward-bending curves and other strange stuff, but on a national level, things work as the basic idea suggests. That’s what the data indicates. Tax labor income a bit more, and a bit will be withdrawn. The effect isn’t necessarily strong – I’ve never argued that it’s strong – but it exists.
It’s correct that correlation isn’t causation. It’s correct that one thing happening after another doesn’t mean the first necessarily caused the second. But we’re not talking about some flimsy new idea being weather-tested for the first time. We are talking about a core human tendency that we observe literally every day in other contexts, something so important that it has established itself as the foundation of economic thought. It works for income, too.
This is a general tool that we can rely on. This is a general tool we’d be fools not to rely on.
An individual might not care about a small shift. Hundreds of wealthy businesspeople might not care about a small shift. The vast majority of people might not care about a small shift. But somewhere out there will be a person who does care, and they will alter their behavior because they’re already on the edge and a small shift will push them over. The bigger the change, the more people will be on that edge.
It obviously doesn’t tell us everything, but often it’s enough, often it’s sufficient, just to recognize which way the wind is blowing when a few people are standing near the edge.
We are not lifeless chess pieces that can be moved around on whim of the king. We react to what’s around us, and income is not an exception.
Good question. I don’t know the answer. When they get through rebuilding the web site, I’ll go look for it.
ETA: most states don’t charge sales tax on stock purchases, so I will assume the Fair Tax wouldn’t, either.
Is that fair though? Rich people have more money than they can spend on daily necessities (that’s why we call them “rich”). A great deal of their income gets spent on investments like stocks, bonds and real estate. If none of those are taxable, they end up with a a very small portion of their income that is subject to taxes. Why should the 99% support a tax system that structurally excludes a large portion of the income of rich people, while raising the effective tax rates of those who are just scraping by and have to spend more of their income (as a percentage) on taxable purchases? Consumption taxes that exclude what rich people consume the most of make the problem worse, not better.