How long's the honeymoon?

[Fear_Itself]

@Magiver

Joe the Plummer is going to raise his rates until he gets back the money he was making before.

Not if Jack the Plumber charges less for the same service. Joe will have to settle for less if competition keeps prices down. Ain’t the free market great?

[Kimstu]

@Shodan

Daddy Warbux makes a million a year, and spends a hundred thousand on himself and nine hundred thousand on his investments. Joe Sixpack makes fifty thousand, and spends it all on himself.

Obama takes two hundred thousand from Daddy Warbux and gives it to Joe. (Fifty thousand of that goes to the accountants and staff at the IRS.)

How much more disposable income is there after the tax hike than before?

That fifty thousand figure sounds kind of ridiculous. Remember, both Daddy and Joe are already filing tax returns. How is it going to cost $50K per tax transaction just to change the top marginal tax rate slightly?

The two hundred thousand figure, of course, is even more ridiculous. Obama is proposing to raise the top marginal tax rate to 39.5% (let’s call it 40% to make the math easier) from the current 35%.

For that 5-percentage-point tax hike to cost Daddy $200K, he’d have to have a top-bracket taxable income of four million dollars. That is, in addition to the $357K that he’s paying lower marginal rates on, he’s got $4M that he’s paying top-bracket taxes on. So even after he pays his taxes, he’s got way more than your hypothesized $1M per year to play with.

If you made those numbers more realistic, I bet you’d find that the overhead required to collect the extra tax from Daddy Warbux is actually less than what he’d pay his hedge fund manager to invest it. (And the tax-collection overhead isn’t just wasted money, either: those IRS accountants and staffers use it to pay for the goods and services that they consume, and so the wealth spreads itself around.)

@Magiver

This is nothing different than raising the minimum wage and expecting the wages above it not to move.

Sure they move, but the point is that they don’t move enough to eat up all the wage increase. That’s why low-income workers actually experience a better standard of living when the wages at the bottom go up. If someone’s making a minimum wage of $5 per hour and the wage floor is raised to $6, he’s got a 20% increase in his gross income. Even if the increase in his net income is only, say, 12%, it still works in his favor, because the prices he pays for stuff aren’t suddenly 12% higher.

Yes, if we all lived and worked in perfectly competitive ideal markets, any mandated wage increase would immediately be canceled out by corresponding price increases, and the net effect on purchasing power would be zero. But we don’t, so they aren’t.