Yes. People who do unpaid internships are supported by parents or spouses who do work. People who pay to pick fruit aren’t really working - they are paying for getting fruit without the middleman, which they consider fresher than what they can buy, and maybe for the experience. They may or may not be getting it cheaper than in the store, but I suspect they devalue the worth of their labor.
Back in the dim and distant past when I was an undergrad (late '80’s) the empirical evidence in the UK suggested that higher marginal tax rates had differing effects on different people, unsurprisingly.
Lower income individuals saw a very small, negative impact. This was predominately explained by a shift away from taxed work into the black ecomony. There was a larger negative impact on incentives among the rich. Middle income earners saw an incentive effect similar in size to that of high earners, but higher taxes created a positive incentive to work. People worked more with higher tax rates presumably because of a target level of tax home income. The more of a pay check that went to the state, the more people had to work to tax home that target income.
There was also a split between men and women. Married women saw a greater disincentive effect than married men.
Sorry - I have no cites for this, and it is all coming from memory. It suggests, as many other people have, that the Laffer Curve is a simplification, and a demonstrative, and has little value itself in planning tax policy.
History shows that with marginal rates between 40% & 70%, higher taxes, paired with higher social spending, boost the economy more than lower tax & spending rates, as your examples demonstrate. Taxes below 40% are depressive by comparison.
Why is this? Some Wild Guesses follow.
First, the more a top earner has to give away, the more productive he has to be to gain great wealth. Higher taxes are an incentive to productivity at the captain-of-industry level.
Second, the redistribution of income across the society gives more purchasing power–ergo more consuming power–to the lower-paid working class. This is pure economic stimulus; you can sell more washing machines, more shoes, more vacation packages, etc., to people who suddenly have the money to pay for them than to those who have enough already.
Lower taxes on the captains of finance, on the other hand, serve to leave that class with more capital to–do what, exactly? Not consume, they already have all the material wealth they require. No, it frees up funds to buy other people’s businesses. And so we see the contraction of the bourgeoisie, & the expansion of the proletariat.
So, yeah, despite what people want to think, high taxes on the very highest earners may be a very strong boost to the economy as a whole & a useful protection to the middle class in particular.
In my experience the existence of the Laffer Curve isn’t really a controversial subject in economics. My base level Macro Economics went into some detail on it. I think the problem is that where we are on the curve is unknowable and so subject to politics. I think that people learn some of the basics of economics and think these are hard and fast rules. The laffer curve is one of a billion things that can have an effect on the economy.
Let’s say tomorrow we find the magic number is 25%. We cut taxes to 25% and this has a positive effect on the economy. At the same time there could be a natural disaster, increases in protectionism, loss of consumer cofidence etc. etc. and the economy ends up contracting for the year. This doesn’t mean that we were wrong about the positive effects of the tax rate, other factors conspired against it. At the same time the fact that the economy did so well in the 50’s even with an 90% tax rate doesn’t mean that such a high rate did not have a negative effect. Or since I have to admit I don’t know, maybe the 90% was the best place for us to be. It also seems to me that where we should be on the curve would be constantly moving with the economy and situation.
Actually it just proves that the laffer curve is an average/aggregate/simplification, as you say - just like literally everything else in economics. Unsurprisingly this fact is no comment one way or the other on the usefulness of it in determining tax policy.
Now, the fact that we have no semblance of a way to calculate the Laffer curve for any given population - now *that *might be a reason for it to have little value in planning tax policy.
Or, alternatively, they’ll take a wage but engage in tax evasion.
All roads lead to Rome.
(Rome in this case being “a 100% tax rate causes 0% taxation.”)
But that is not true. I’m not being obtuse; I understand the theory, and the point you are making. It’s a thought experiment. Clearly, a 100% tax rate is not possible. However, I just think the assumptions the curve is based on help justify a model that does not accurately reflect reality.
The reality is there would never be a 100%, across the board tax rate, however, someone might purpose a 100% tax rate on incomes over $100 million with a net wealth of over $1 billion. I sincerely doubt it would happen, but let’s say it does. Now you, an investment banker who loves his job, makes 2% of the funds you control. This has resulted in an average income of $150 million/year. Then the tax rate comes into effect. Do you stop working? Do you stop working once you have made your $100 million? In the real world, I think many people would not dramatically change their behavior. I could be wrong, but I think after a certain point, money is not the primary motivator, so taxation rates are subordinate to things like respect and status.
That was essential what I was trying to understand with my initial question. At a certain point, after practical considerations are taken into account, taxation rates seem like they shouldn’t matter as much as many other factors for some people. The assumption seems to be that money represents the same type of incentive to all people, and that that is the only reason people work. I think it’s clear some people would still work, and give all their money to the government if they believed the government was doing a good job.
Well, presumably, a government that takes 100% of your money would provide you with food, shelter, etc. I don’t think it’s irrelevant because there are plenty of lucky people who never have to work, and they, disproportionately control our economy.
So then why is there no agreement on what the optimal rate is, or the effect tax rates will have in the real world? Can you provide a link to any study that has correctly, and reliably predicted the effect a modification in the tax rate has had?
I’m pretty sure that’s not what’s meant by being at the far end of the Laffer curve, which I suspect is based on the total percentage of your money that the Government takes, meaning that at 100% taxation, you get no money at all.
That said, I suspect that if there was a 100% tax on incomes above a given amount, employers would rapidly adjust wages to cap at that amount. Bonuses, on the other hand, are driven by the same activities that are incentivized by promises of promotion and status, so the people who earn them might still do the work and still earn the excess bonuses - but I would be unsurprised if the company capped the bonuses to levels where the employee would actually get some of it. (And then give them the rest in non-cash income - that is, tax evasion.)
Especially because it is often the case that businesses that get too big become inefficient, as we saw in the conglomerate fad of a few decades back. Too many different businesses lead to dilution of management attention. Too many of the same business under one roof lead to the problems of monopolies.
What happens if the rich don’t buy businesses? They then chase high return investments, that will become riskier and riskier until we get a collapse, or they can drive up the price of stock as more investors bid for shares. As you implied, it is pointless to invest in real production when the consuming masses have no money.
On the other hand, too high taxes drive money into unproductive tax shelters.
The problem with the Laffer Curve isn’t the curve itself, which is an interesting thought experiment even though it has no real practical use. We shouldn’t even be targeting a maximization of short-term government revenue anyway. Our policy concerns should be more utilitarian than that, greatest good for the greatest number, long term growth, etc.
The real problem is the knuckleheads out there that propagate the idea that it’s actually valid and relevant. At least one conservative magazine has instituted, as editorial policy, the position that the Laffer Curve is in effect at American levels of taxation. Shame that McArdle doesn’t name names in the link. Her desire to avoid burning bridges might be good for her future income stream, but it would’ve be handy to know which magazine was so utterly bereft of integrity and principles.
Of course a 100% tax rate is possible. It’s simply stupid, but it’s bene done numerous times. And Laffer curves do model reality. It’s simply that there are a lot of factors going itno it and there’s way to determine where you are on it except via experimentation.
No “could” about it. You are wrong. This has actually been observed in actual concrete practice numerous times. People will simply stop earning money (or creating wealth) once it’s taxed too high.
That’s a whole lotta presumption. A government with a 100% tax rate has no incentive to expand services.
There’s no agreement, because most of the people who want to raise taxes have ulterior motives, no common sense, or have no economic understanding. Take your pick. In a more practical sense, we have no yet invented a mathematical formula which defines the optimum tax rate. We can only put it in a reasonable range based on experience.
In case anybody wants an original source, here’s Laffer describing his theory:
By the same token, taxing you a lot should make you more productive, assuming you live above the subsistence level (in which case you’d become malnourished and less productive). Want to give it a try? I warn you that it hasn’t worked out well in the past.
What separates the “captain of industry” from a comfortable middle-class worker? Your explanation makes no logical distinction between the two, except that you want the captain to fall in social status and the middle-class worker to rise.
You seem to think that investment is a zero-sum game, in which nobody opens up new factories or upgrades their computers, but only passes around poker chips leaving nobody better off. In that case then the same thing applies to investments from anyone who’s saving money, and we should all give up the silly exercise and put money under our pillows instead.
Of course this is hogwash. What your arguments are really trying to do is to make the money of the rich illegitimate, and the money of the poor legitimate, by making poorly-reasoned arguments about how they not only don’t do any good by investing it, but mysteriously actively harm everyone else. As Milton Friedman said(start at 6:00): what do you suppose the standard of living in the US would be if the amount of capital in the country was what it was 100 years ago, before these infernal rich people started building those pesky factories and computers?
Well put.
We also seem to be…well, at least it seems that way to me…restricting ourselves to wage income in this discussion. Taxes on capital gains and dividends are also important factors to consider.
As people earn more wealth, they shift their economic focus more to investments and away from wage-earning income. And there are wildly differing risk profiles associated with each: 3 different risk examples are (1) wage-earning activity, (2) investment in a mature industry that pays dividends (e.g. an electric utility), and (3) investment in entrepreneurial ventures with a significantly higher risk profile.
The tax rates on the wages, dividends and capital appreciation (respectively) will affect the rewards of each approach and therefore raise/lower the risk hurdle for investment in each.
In theory, you could probably raise the marginal rate on income to 50% or more, but if it was accompanied by a drop in capital gains tax rates, and dividend tax rates, you could end up with a net increase in investment and job creation, as more energy from high earners was focused in that direction. You might also experience a drop in income tax revenue.
Dividends, in particular, suffered from punitive double-taxation (and to some degree, still do) in past years, which incented companies to hoard cash on their balance sheets, where it was often squandered. A freer disbursal of dividends makes management much more accountable to shareholders who will ensure that the company has a damn good reason for keeping the cash instead of paying it back to investors.
This is sort of what you saw after the Bush tax cuts.
Right - just like we put weight onto a thoroughbred horse to make it run faster. The more you add, the faster they go. All other things being equal.
ISTM that we should raise taxes on the poor, therefore - this will make them more productive, and therefore more in demand for jobs.
Regards,
Shodan
Here is what some researchers have to say about the impact of taxes on GDP:
http://www.nber.org/cgi-bin/printit?uri=/digest/mar08/w13264.html
This is an interesting point. Right now our tax policy greatly favors long term market investing. Investing in a business venture will have to exceed the rate of return of the market and the serious increase in the tax rate incurred. The double taxation involved in dividends doesn’t seem to solve any issues and just deincentives companies towards offering them.
Thoroughbreds. Right.
In this analogy, who’s the horse, who’s the jockey, & who’s the owner of the horse?
That’s not how analogies work.