Will taxing the rich cause them to work less?

[ITR_champion]

In response to Barak Obama’s tax proposa, the Weekly Standard is again trotting out the line that higher taxes on the rich will reduce their motivation for productive work. I’ve never understood this argument because it doesn’t accord with how I do work and how others seem to do it. On a typical work day, I’m not thinking to myself about how much money I’m earning, and I’m not putting forth effort based on money. Rather, I have a job to do and I do it. I’d put forth the exact same amount of effort if I earned ten percent more or less. Obviously if my salary dropped too low I’d have to quit this job and find another one. But as long as my salary is sufficient I do the work without regards to money. It’s the same for most people, as far as I can tell.

So let’s take a rich guy, Don Dewey off the illustrious law offices of Dewey, Cheatham, and Howe. Dewey earns $500 and hour to prepare lawsuits. (Extremely productive lawsuits, of course.) Now along comes Barak Obama who imposes a tax that reduces Dewey’s take-home income to $450 an hour. As I see it, there are two possible results. Either Dewey will work for that much or else he won’t. If he does, society loses no productive labor. If he doesn’t, I’m sure there’s someone else willing to do the job for those wages. What I can’t imagine is Dewey continue to work, but downgrading his effort by ten percent.

[RickJay]

I’m sorry to nitpick, but BARACK, with a C. The guy might be President in less than a year.

[BrainGlutton]

We’re talking about a class of independently wealthy people who, for cultural reasons, work even though they don’t have to. I can’t see how taxing them heavily would make a difference in that regard; it never did before, in times when the top tax rate was much higher.

[Jackmannii]

@ITR champion

So let’s take a rich guy, Don Dewey off the illustrious law offices of Dewey, Cheatham, and Howe. Dewey earns $500 and hour to prepare lawsuits. (Extremely productive lawsuits, of course.) Now along comes Barak Obama who imposes a tax that reduces Dewey’s take-home income to $450 an hour. As I see it, there are two possible results. Either Dewey will work for that much or else he won’t. If he does, society loses no productive labor. If he doesn’t, I’m sure there’s someone else willing to do the job for those wages. What I can’t imagine is Dewey continue to work, but downgrading his effort by ten percent.

I can imagine Dewey increasing his efforts to file lawsuits by at least ten percent to make up the difference.

[Crotalus]

The argument, as I understand it, applies mainly to people who earn money in ways other than salaries. It makes the most sense regarding people who can choose to invest in or work on a project which involves risk. Higher taxes on the potential reward are a disincentive to take the risk.

[vetbridge]

I recently had a job applicant who turned down the job I offered, because she did the math and realized her unemployment compensation wasn’t so bad after all. :rolleyes:

[BrainGlutton]

Let’s be careful how we use the term “the rich.” From Class: A Guide Through the American Status System, by Paul Fussell:

My researches have persuaded me that there are nine classes in this country, as follows:

Top out-of-sight
Upper
Upper middle

Middle
High proletarian
Mid-proletarian
Low proletarian

Destitute
Bottom out-of-sight

One thing to get clear at the outset is this: it’s not riches alone that define these clases. . . . “Economically, no doubt, there are only two classes, the rich and the poor,” says George Orwell, “but socially there is a whole hierarchy of classes, and the manners and traditions learned by each class in childhood are not only very different but – this is the essential point – generally persist from birth to death. . . . It is . . . very difficult to escape, culturally, from the class into which you have been born.” When John Fitzgerald Kennedy, watching Richard Nixon on television, turned to his friends and, horror-struck, said, “The guy has no class,” he was not talking about money.

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Not that the three classes at the top don’t have money. The point is that money alone doesn’t define them, for the way they have their money is largely what matters. . . . The main thing distinguishing the top three classes from each other is the amount of money inherited in relation to the amount currently earned. The top-out-of-sight class (Rockefellers, Pres, DuPonts, Mellons, Fords, Vanderbilts) lives on inherited capital entirely. . . .

“When I think of a really rich man,” says a Boston blue-collar, “I think of one of those estates where you can’t see the house from the road.” Hence the name of the top class, which could just as well be called “the class in hiding.” Their houses are never seen from the street or road. They like to hide away deep in the hills or way off on Greek or Caribbean islands (which they tend to own), safe, for the moment, from envy and its ultimate attendants, confiscatory taxation and finally expropriation. . . .

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The next class down, the upper class, differs from the top-out-of-sight class in two main ways. First, although it inherits a lot of its money, it earns quite a bit too, usually from some attractive, if slight, work, without which it would feel bored and even ashamed. It’s likely to make its money by controlling banks and the more historic corporations, think tanks, and foundations, and to busy itself with things like the older universities, the Council on Foreign Relations, the Foreign Policy Association, the Committee for Economic Development, and the like, together with the executive branch of the federal government, and often the Senate. . . . And secondly, unlike the top-out-of-sights, the upper class is visible, often ostentatiously so. . . . When you pass a house with a would-be impressive facade visible from the street or highway, you know it’s occupied by a member of the upper class. . . .

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We now come to the upper-middle class. It may possess virtually as much as the two classes above it. The difference is that it has earned most of it, in law, medicine, oil, shipping, real estate, or even the more honorific kinds of trade, like buying and selling works of art. Although they may enjoy some inherited money and use inherited “things” (silver, Oriental rugs), the upper-middles suffer from a bourgeois sense of shame, a conviction that to live on the earnings of others, even forebears, is not nice.

From The Next American Nation, by Michael Lind:

. . . The white overclass is the child of the former Northeastern Protestant establishment, produced by marriage (not only figurative but literal) with the upwardly mobile descendants of turn-of-the-century European immigrants and white Southerners and Westerners. Unlike the Northeastern establishment . . . this relatively new and still evolving political and social oligarchy is not identified with any particular region of the country (though it is concentrated in East and West Coast metropolitan regions). Nor does the white overclass dominate other sections through local, surrogate establishments, as the Northeastern establishment once did. Rather, overclass Americans are found in the higher suburbs of every major metropolitan area, North and South, coastal and inland. Unlike the sectional elites of the past, members of the white overclass are not even identified with the regions in which they happen (temporarily) to live. The white overclass, homogeneous and nomadic, is the first truly national upper class in American history.

The white overclass is the product, not merely of the amalgamation of Anglo- and Euro-Americans, but of the fusion of the rentier and managerial-professional classes. This blurring of the upper and upper-middle strata is a relatively new development in the United States. In earlier generations, there were distinct landowning and rentier classes, with their own lifestyles and institutions – cotillions, seasons spent in the country, and the like. The elaborate rituals that governed upper-class life, such as dressing for dinner, were designed to conspicuously display wealth, including a wealth of leisure time. That was a long time ago. There is a class, or rather a category, of the celebrity rich, and there are still pockets of old-fashioned rentiers in the U.S. – in Virginia, there are still planters who do not work and who hunt foxes with hounds – but these subcultures are detached from the summits of power. Members of the upper class who want to make a mark in the world tend to adopt the style of life and dress and speech of the managerial-professional elite. Even though they do not have to, most members of the small hereditary upper class go to college and get executive or professional jobs, and work, or at least pretend to. Instead of serving as a model for well-to-do executives and lawyers and investment bankers, the hereditary segment of the American overclass conforms to the segment immediately below it, the credentialed upper middle class.

[John_Mace]

As I understand Obama’s tax proposal, it amounts to fairly small tweaking of the tax code, basically rescinding the Bush tax cuts for wealthy Americans. I can’t see that such a small change would change behavior in any significant way. It might encourage people to try and hide money and/or receive compensation in a different way so as to lower their taxes, so I’d be a bit suspicious of any revenue projections made based on the tax increase, but that’s a different matter.

[villa]

The research I saw done on marginal tax rates and their effects on incentives to work back when I was an econ student (late '80s) suggested that there was a small increase in the incentive to work for people as marginal tax rates rose. This was because people with low to mid level incomes had target take home earnings levels, and felt the need to increase hours where possible if taxes rose. Amongst very high earners, there was a small disincentive to work, as most aspirational goals re income had been met, and so people felt less inclined to put the extra time in if they were keeping less of each buck.

The effects were, though, minimal, if I am remembering right. The greatest effect was seen I believe in self employed individuals such as contractors, who were provided with an incentive to work off the books, thus not changing overall work done, but reducing the amount in the “legitimate” economy.

Sorry not to have a cite on this.

[Voyager]

I’m unaware of any data showing that people worked harder in the past seven years than during the Clinton years, with higher taxes. We’re all assuming that the tax rate is not confiscatory here, right?

I’d say that Mr. Dewey gets pressure from the partners in his firm to work as much as he can, so I doubt a tax increase will change anything. The compensation mechanism for many wealthy people is such that I don’t see how it would be affected much by the tax rate. If a bonus is a significant amount of your income, you will work to get that bonus, which is not set until the end of the year. Slacking off might mean no bonus, which is going to be far more important than the tax rate. If you get a lot of money from stock options, that is also a binary award. In fact, your earnings come several years after the activity that got you the options, so I doubt there will be an impact.

We might argue that someone who keeps more money from lower taxes, and saves it, might retire early and thus actually work less. I wonder if there have been any studies on this.

[ultrafilter]

villa’s recollection is consistent with what I’ve seen (although I am no expert on this), and is sensible.

[Magiver]

@BrainGlutton

We’re talking about a class of independently wealthy people who, for cultural reasons, work even though they don’t have to. I can’t see how taxing them heavily would make a difference in that regard; it never did before, in times when the top tax rate was much higher.

The question is will you get more tax revenue. Wealthy people pay most of the taxes now. Inceasing that load is an invitation to move that wealth to other markets. It’s not a complicated process to create an investment LLC in another country.

[Fear_Itself]

I would think that the portion of the rich who actually work for their income would work even harder to maintain their accustomed standard of living. If his trophy wife threatens to leave if her monthly allowance is cut, Biff will work like a demon to make up the difference. Raising taxes on the rich could be the best thing to increase productivity in America.

[Shodan]

@ITR champion

So let’s take a rich guy, Don Dewey off the illustrious law offices of Dewey, Cheatham, and Howe. Dewey earns $500 and hour to prepare lawsuits. (Extremely productive lawsuits, of course.) Now along comes Barak Obama who imposes a tax that reduces Dewey’s take-home income to $450 an hour. As I see it, there are two possible results. Either Dewey will work for that much or else he won’t. If he does, society loses no productive labor. If he doesn’t, I’m sure there’s someone else willing to do the job for those wages. What I can’t imagine is Dewey continue to work, but downgrading his effort by ten percent.

Economic changes like this act on the margins.

Assume Dewey is working sixty hours a week. This is the point at which his desire for money outweighs his other considerations - his family, his hobbies, whatever. If you want him to work seventy hours a week (all other things being equal), you have to offer him more money. But if you offer him less, then he won’t work sixty hours a week. He’ll only work, say, fifty hours a week.

People balance effort, risk and reward all the time. It seems simplistic to assume that changing one of those factors will have no effect on the rest.

Put it this way. I want to hire somebody to clean my house. I will pay a hundred dollars to clean the first floor, and one dollar to clean the upstairs. Both floors can be reasonably cleaned in an hour apiece. Which floor will it be easier for me to get someone to clean?

Regards,
Shodan

[Furious_Marmot]

Does anyone have a cite for the actual numbers involved in this tax proposal? Knowing who would be affected and how much would make this an easier question to debate. That said, it would depend on how the individual rich person makes their money. For salaried rich folks (are there any?) the choice is to make a little less money or quit and make nothing. For the self employed rich, it would factor into the risk-reward analysis that they presumably do before embarking on a new venture. The end result might be slightly more risk aversion. As for people who’ve ‘met their aspirational goals re income’- who knows? The idea of someone who continues to generate a high income even though they have no interest in making that additional money is so strange that anything we say about their motivations is likely wrong. We should find some of those guys and ask them.

Tangentially, how can the president (whoever they are), implement a tax plan? If they want to create tax policy, shouldn’t they run for Congress? Or, as is the case this year, just stay where they are and let 2 other people run.

[Magiver]

@Fear Itself

I would think that the portion of the rich who actually work for their income would work even harder to maintain their accustomed standard of living. If his trophy wife threatens to leave if her monthly allowance is cut, Biff will work like a demon to make up the difference. Raising taxes on the rich could be the best thing to increase productivity in America.

OK, lets look at Theresa Heinz Kerry. Just for discussion purposes lets say John Kerry is a trophy husband. She hides her income in tax free municipal investments. Her tax rate was something like 12% when it was published. She can just as easily move that money overseas and claim a house in some luxury island tax shelter. It’s not like it would be inconvenient to vacation in the Bahamas for 6 months of the year. I’d certainly visit her if invited. Money will always flow away from taxes and that includes foreign investment in the United States.

[Fear_Itself]

@Magiver

OK, lets look at Theresa Heinz Kerry.

Let’s stick to people who represent my example, please.

[clairobscur]

I’ve some issues with this question :

1. There’s an assumption that richer people will be more productive than poorer ones. I don’t believe this to be true. Not only because competence isn’t always rewarded by wealth (you can become rich for many other reasons than being the best in a particular field, and being the best doesn’t mean that you’re actually producing a lot of wealth) but also because people whose work has the most positive impact aren’t necessarily richer. For instance a scientist making a breaking discovery will have a huge impact on society’s wealth but this discovery will make his company’s stockholders and CEO rich, not him.

2. If it is true that taxing less will result in people working more, it certainly applies also to poor people. So, why should we assume that by switching the tax burden from many poor people who will work more to few rich people who will work less, there will be a net loss in the overall productivity? I personally see no reason to make such an assumption.

3. Actually, if you’re poorer, you’re more likely to put your time and money to more productive uses. If you give 10 000 dollars to 100 poor people, those people will generally try to make the most with this money, be it in the way they spend it or the way they invest it. Those 10 000 dollars are very important to them.

On the other hand, if you give 1 million dollar to a single person, already rich, each 10 000 dollars share will be for him a trivial amount that is likely to be spent carelessly. IOW, giving some money to many poor people is IMO more productive than giving a lot of money to few rich people (and giving money is equivalent to taxing less).

A good example of my position is the exceptional success of micro-credits in third world countries. You hand out something like 20 dollars and you get a new business started. To sum up, I think that the concentration of wealth is very counter-productive.

4. Finally, I’m a firm believer in the saying “cemeteries are filled with people who thought they were irreplaceable”. IOW, regarding this particular issue I believe that even if a rich and very productive individual decides not to work any more because he finds the taxes too high, there will be many equally talented people willing to take the job. Really unique, irreplaceable geniuses are so rare they aren’t worth mentioning.

[villa]

@Shodan

Put it this way. I want to hire somebody to clean my house. I will pay a hundred dollars to clean the first floor, and one dollar to clean the upstairs. Both floors can be reasonably cleaned in an hour apiece. Which floor will it be easier for me to get someone to clean?

Regards,
Shodan

Seeing as you bring up lower paid professions… What you neglect to consider is that if you drop what you are offering to $50 a floor, it is possible, indeed likely if there is unemployment, that you will get both floors cleaned for $100. That’s the effect of marginal tax rates on way more people than suffer a disincentive.

[Shodan]

Another issue is a rise in marginal tax rates can cause people to shift their compensation to non-taxable forms. IIRC, one of the reasons why health care costs so much in the US was that there was a wage freeze during WWII. Employer-paid health care is non-taxable, so that’s where the shift happened. Possibly one effect of the tax increase would be an increase in the cost of health care. So Obama will have to combine a tax increase with legislation to prevent people from opting out of any government health plan, and thus avoiding a loss of income by shifting it to health care. Or dependent care, and so forth.

Someone once said the first law of ecology was, you can never do just one thing. Same is true of economics. People don’t always sit still and fork over.

Regards,
Shodan