Whatever You Tax, You Get Less Of
One of the greatest lessons of economics that is simple, yet so often misunderstood, is something that Art Laffer put to me very succinctly: “Whatever you tax, you get less of.”
In general, people seem to understand this.
We tax cigarettes because, at the margins, less people will smoke if smoking costs more. We, as a society, recognize that smoking will cause death; however, even though we know that every cigarette marginally diminishes the smoker’s health, we don’t criminalize smoking. Instead, we just tax cigarettes in hopes that this “sin tax” will help to influence some people not to smoke. Of course, economists also recognize that the demand for cigarettes, especially to a nicotine-addicted person, is relatively inelastic, and therefore a cigarette tax is a good source of government revenue. However, demand elasticity aside, we do recognize that when we tax cigarettes, less cigarettes are smoked. Whatever you tax, you get less of.
When it comes to income, it would seem that people understand the concept, but their application of the concept isn’t well thought out.
Given the class warfare that seems to dominate today’s political conversations – and, with 5% of the population paying the bulk of the taxes, it’s politically expedient for politicians to promise the other 95% benefits at no cost to them, but for which the other 5% will be forced to pay – I think it’s safe to say that there is a fair amount of the “have nots” thinking that there are too few “haves” and too many “have nots” and that by increasing taxes on the “haves” we will simply get less “haves” and we will, to quote Barrack Obama, “level the playing field.” Oh, but that were true.
Here’s the problem with that line of thinking: Remember, whatever you tax, you get less of. What, exactly, are we taxing when we tax those “rich” people? Are we taxing their assets, or are we taxing their current year income? We tax current year income. So, what do we get less of? We get less high income earners.
In the short term, we get less high income earners because the government takes some of their earnings and redistributes it (through direct redistribution and indirect redistribution in the form of government operations and projects) to those who earned less income, giving a whole new definition to the term “unearned income”, as defined by the IRS currently anyway.
In the long term, we get less high income earners because people substitute away from those activities that earn higher incomes. Earning a lot of money is hard work: there’s greater responsibility, greater stress, greater risk, and more years of hard work on the front end to be able to take on everything that comes along with activities that generate more income. It’s far easier to earn less money: anyone can flip a burger. Also, dual income families where income is roughly equal between the husband and wife may decide that if they are going to lose 50% of their income to taxes, they would be better off having one of the two stay home, thus decreasing the output of the economy as a whole because less people are producing goods and services.
Now, the question is do we really want to have less high income earners? Is that really what those who want to level the playing field want? I posit that those who vote to level the playing field often think of people like Warren Buffet and Bill Gates as those who should contribute more in order to level the playing field.
I’ve got news for you: Warren Buffet and Bill Gates could both not earn a dime for the rest of their lives, not pay any income taxes, and live perfectly comfortable lives. In fact, they could not earn another dime and be wealthier the day they die than almost any other American. Why? Because they are wealthy today. What’s worse is that if we enacted high taxes, we would probably find that their wealth would increase compared to the rest of the population. If their relative wealth were to increase, that would be precisely the opposite of the “level the playing field” crowd’s goal. This is what we in economics refer to as secondary effects, or unintended consequences.
When we tax income, we just ensure that we have less high income earners. Let’s think about what that means; let’s examine the secondary effects.
Average Joe is a hardworking American. He has been working at a fast food chain since he was 16, and has worked his way up to a district manager. He’s 40 years old, making $65,000.00 per year, has a decent amount of debt like a lot of Americans, and he desperately wants to take his experience to open his own restaurant, but he needs to save around $250,000.00. Given that Joe is carrying about $30,000.00 of credit card debt, trying to save that money is difficult, and taking on even more debt in loans is a substantial risk at his age.
Joe has worked so hard over the years, and distinguished himself as such a stand-out in the organization, that he’s asked to take on a vice president role in the company. Joe will be paid a salary of $150,000.00 per year, with a bonus potential of 200% of his salary, depending on company performance. In his first year, Joe earns a 100% bonus, but is let go because of budget cutbacks in the organization.
Guess what: Joe is now rich. That’s right, according to the tax code, Joe is in the top 5% of income earners, and we’re going to tax him to level the playing field. Joe will probably pay well over $100,000.00 in taxes. Joe was finally getting to a point in life when he unloaded the burden of credit card debt that straps so many Americans, and he could have established a base of savings that would have begun to accrue interest so that interest was finally working for him. Joe could have used that savings towards starting his own restaurant, which would have employed more people and brought more diversity of restaurants to the community.
Joe’s hard work could have finally made him just barely self-sustaining and finally put him in the black, but because he’s now “rich”, he’s going to have to give a substantial amount of his earnings to Uncle Sam. So much for leveling the playing field. Now that he was finally getting to a point where he could start caching up to the truly wealthy, his tax burden is making it more difficult for him. We’re leveling the playing field by keeping Joe in relative poverty.
Meanwhile, Warren Buffet and Bill Gates will pay roughly $45,000.00 per $300,000.00 of income because their incomes come predominately in the form of dividends, interest, and long-term capital gains.
That’s right: the “income gap” between Average Joe and the Warren Buffets (net of tax) of the world is actually widening. The wealth gap is widening at an even faster pace because of the power of compounding interest. And, to make matters worse, people like Average Joe have an even more difficult time attaining the level of wealth of Buffet and Gates because the government classifies them as “rich” the second they actually are in a position to make their lives better and earn their way out of relative poverty.
By taxing the “rich”, so long as we classify rich as those who earn a lot of W-2 or 1099 income (for those not familiar with the tax system, these are “earned income” or wages as opposed to “unearned income” such as interest, dividends, and capital gains), we actually ensure that we get less rich people in the future. Those with wealth continue to have wealth, and those who aspire to become wealthy by working hard will be kept down by the tax system.
In the long term, less people will work towards the American Dream, because we will have taxed away the opportunity for those who would only be moderately successful in comparison to the few notables such as Henry Ford, Sam Walton, Bill Gates, Warren Buffet, and those whose work commands compensation on the order of magnitude the likes of which most Americans will likely never achieve. So, not only will we have made it more difficult to become wealthy, we will, at the margins, reduce the number of people who put in the necessary work to become wealthy, and that only reduces our production as a whole.
Whatever you tax, you get less of. If you tax high income, you’ll get less high income, and that will keep the wealthy wealthy, and the poor poor. Do we really want to level the playing field by forcing poverty on future generations?
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According to your blog the cigarette tax has been enacted as a means to diminish demand. However, it is a means to increase revenue to offset the cost of a smoker’s price in health care. A major problem in the health care system is cost shifting. This is a means to internalize the price of an externality. It is politicized as a “sin tax”, but it has other economic justifications.
Your view of the economy has become far too myopic. You must remember that an economic model is just that: a model. It is a way to view the world; however, every economic model has deliberately held other things constant. Once you begin implementing the model you must take these variables into account. It appears to me that you are a physicist utilizing a model like, say, F=MA. Is F=MA correct? Of course it is, but if you drop something from an airplane it is not going to fall at your predicted rate because you did not update your model, in this case F=MA, to include wind resistance. It does not make your model incorrect, simply incomplete.
For example, when you take your model to the “real world” you state that people will not have an incentive to work hard and obtain a higher level of income. I don’t believe this is true. From an anecdotal point of view, I would have to say that I would not, and will not, stop working simply because I am taxed more. There are factors in my drive and will to work that are far beyond that of economics. Second, I don’t see the same profit motive you speak of during the late 1940s throughout the 1960s. People still worked, they still invested roughly the same amount in companies, and still had a large productive capacity. All this under the “evils” of Keynesian economics.
What is it that can prevent people from advancing up the financial chain? While it is true that too much regulation and taxation can hinder one’s chances, so too do other factors. The inability for someone to pay for health care, for example, is a problem. If you are a family and you get sick then you run huge deficits, go bankrupt, and lose your home. If the rich had been taxed enough to pay for health care then you would not be forced to pay a life savings. This is just one example, but the economy- and society as a whole- is far too complex to simply be fixed by cutting taxes. That would be like curing cancer with aspirin.
hobosapiens,
I understand that the cigarette tax has more goals than to just reduce the quantity of cigarettes demanded, but the focus of this article was not the cigarette tax so much as it was income tax. The point of the cigarette tax example is that people generally understand that by taxing cigarettes, less people smoke – this is part of what makes it politically palatable. I do agree, however, that there are other economic justifications that back the cigarette tax. Personally, I’m opposed to taxes on cigarettes even if we assume that money is being used for health care, because, the way I see it, smokers already pay a huge tax for smoking: they pay with their health and with the enormous medical bills that come along with poor health caused by smoking. What’s sort of ironic about the whole thing is that by having the government subsidize health care, we actually help support demand for smoking because smokers won’t have to bear the full cost of smoking. The corollary to “whatever you tax, you get less of” is “whatever you subsidize, you get more of.” By subsidizing health care, we get more smokers, because increased health care costs are directly associated with smoking. Thus, in essence, we are subsidizing smoking.
Your comment seems focused on health care and I gather that you believe that the “rich” should pay for everyone else’s health care. Even if we agreed on this point (which we clearly don’t), I think you missed my point about how we define “rich”. Is a guy living in NY paying $4000/month in rent to house his family of 4 children “rich” if he’s making $250K/year? Is someone with $30K in credit card debt from years of being unemployed “rich” if he makes $125K/year? Even if we agreed that the “rich” aren’t paying their “fair share” and should pay more, the very definition of “rich” is subjective. How do you define “rich” when you say, “If the rich had been taxed enough to pay for health care…”?
I’m not going to delve into the ills of the health care system, but suffice it to say that the ills in the health care system can be directly linked to regulation and taxation. The single biggest economic problem with the health care system is what is known in economics as the third party payer problem. That said, let’s agree to disagree about health care, because that’s tangential to the issue at hand.
You say I’m like a physicist with a simple model, applying that model to the “real world”. I grant you that my model is simple, because I’m focusing on a single thing, much like they physicist who talks about forces acting in a world devoid of air resistance and friction. Physics is so much simpler without those pesky little things! However, studying physics without air resistance and friction does not negate the validity of physics, as you’ve said. In fact, you’ve admitted that regulation and taxation can hinder people’s ability to “advance up the financial chain”. You’ve admitted that my model isn’t wrong, it’s just simple.
In other words, it seems that we agree that whatever you tax, you get less of. We might disagree about the extent to which that’s true in reality, and we may disagree on the value of trade-offs that can be made (such as higher taxes in favor of health care), but we agree, in principle, that whatever you tax, you get less of.
I think you’ve misread this article if you think it says that the economy, or society as a whole, can be fixed simply by cutting taxes. I completely agree with you: it’s not that simple. From my perspective (and I have a feeling you disagree), there are far more regulations and infringements on personal liberties that must be addressed, taxes are only the beginning.
I was attempting to use health care as a means to illustrate what I consider to be a fallacy in your argument. Your argument, as I understand it, is that if you tax more you get less wealthy people. What I am trying to point out is that this is incorrect. If you tax wealthy people and create something, such as a new health care system, it will make those who are worse off more wealthy. They will have new budget constraints that allow for more purchases. It seems to me that your argument is that if we tax this money goes no where, and that is simply not true. There is the “leaky bucket” metaphor, but the purpose of the metaphor is not to say that because it is leaky that there should not be a bucket.
Do we get fewer rich people because of taxation? No. What school do you go to? If it is a state school then it is supported by state funds. Will you be able to get a better wage after you graduate? Yes. You will be able to generate a greater level of wealth because of state funds. Do we get fewer rich people with taxation? No, we get a greater numbers of people, like you and I, that have better opportunities because of taxation.
Let me also use the creation of fast food restaurants. Ray Kroc became wealthy, in part, because of the building of the interstate system. Taxes were taken from the rich, built roads that created a certain demand, and Kroc, along with many others in McDonald’s became more wealthy than if the highways were never built.
As for regulation, I believe we need better regulation to support a capitalist system. I am a capitalist, just not precisely the same as your school. I might be arguing that the pool needs a life guard, but this does not mean that I am against swimming. Poor regulation leads to what we have now. Business cycle theory does not take into account the political behavior that occurs during the downturn. My argument is that these types of things need to be taken into account for anybody anywhere to ever be rich. A stable political climate, brought to you by taxation, is what leads to wealth.
Then it seems your analogy was wrong, because the analogy you used suggests that my model is not wrong, just simple.
I agree that money given to the government does go somewhere. But, as you acknowledge, there is frictional cost to sending money to Washington, DC. Ignoring whether or not we want the government to transfer money from some to others, the “leaky bucket” you cite does make the transfer from the haves to the have nots less efficient.
Your argument is based on a premise similar to that which you accuse me of holding with regard to the government. For the record, I don’t believe that money sent to the government goes nowhere. You, on the other hand, seem to think that money left in the hands of private citizens goes nowhere.
What do Vanderbilt, Rockefeller, Mellon, and Carnegie all have in common? They were extraordinarily wealthy men who donated fortunes to universities in order to advance education. Strange, huh? They voluntarily parted with some of their fortune to support education. In fact, if you look around the universities in America, you will find wealthy people’s names all over them – you might even find a few corporations’ names. Wealthy people value education, and, without government intervention, have proven that they give money in order to support education. You mention that I need government in order to educate me; however, I can provide evidence that wealthy people support education without government intervention. Why must we tax the wealthy to do what they would do anyway?
Wealthy people spend money, hire people, and donate their money to help those in need, or to support things such as education. When you tax them disproportionately – and when you support high taxes on them – you are basically saying that wealthy people are not able to spend their money as well as the government can. You are also taking away their freedom to choose where their money goes. One of the fundamental tenets of capitalism is that the individual is free to choose. A system by which the government supplants its own judgment over the individual’s through taxation, is not capitalism.
You might say, “Well, those rich greedy bastards will just save their money.” And what harm does that pose? Banks might then be well capitalized. It seems to me that we have a problem at the moment with banks having enough capital. Imagine if the wealthy were allowed to save it so that we could all get loans. Wouldn’t that be grand?
A stable political climate is not brought about by taxes; a stable environment for a free market is brought about by the rule of law.
The point of my article was not that if you tax income, you get less wealthy people, but that if you tax high income earners, you get less high income earners. First, the government takes a lot of their income; thus, you have less high income earners because the government takes it. Second, people substitute away from activities that produce high income. Third, people hide their income to avoid taxes (the cost to hide the income is less than the tax in this case). Forth, dual income families may decide to become single income families. There are myriad reasons why taxing high income earners will produce less high income earners. I know you claim that taxing high income earners does not produce less high income earners; however, the empirical evidence is not on your side.
Let me again point out the fallacy of your claim. It is really all right there in your title. “Whatever you tax you get less of”. This is, as I said before, too simplistic to offer any good insight into the world. Correct or not correct you still can’t get much from it. You have not brought in the variable of price elasticity. If you increase something like bananas by say $ .10 then you will have fewer bananas. If however, you tax gasoline by $ .10 you will not have less gasoline on the market. People’s demand for a good is dependent on the elasticity of demand. I think that the demand for high income jobs is such that an increase in taxation will not lead to a decrease in high income earners. My definition of high income here is the market value, not the value after taxation. You have already figured that into your definition of high income earners. So, perhaps we are arguing semantics, but from the tone of your argument you care very little about our discussion.
“You, on the other hand, seem to think that money left in the hands of private citizens goes nowhere.”
It is a shame that you have, after only two posts to my comments, already resorted to this tactic. I do not believe this and I take extreme offense to people like yourself who assume such utter nonsense. You think that because I see a role of government that I don’t believe in the market? This is absolutely foolish. There is a Pareto efficiency. There is also a such thing as the need for government. Taxation can be used to generate wealth where it otherwise would not have existed. It appears from this website that you are a student; I am assuming from your posts that you must be a sophomore or junior in economics. There are some corporations helping you, but you must understand that you are being supported greatly by taxpayer money. Because of this fact, any wealth you ever earn will be generated from the taxes garnered from the public that payed for your education. If you had a political philosophy based on principles- rather than what appears to me to be nothing more than anger- you would stop leaching off the taxpayers and start up a business. If taxpayer money were the root of all ills and did nothing but destroy wealth you should have the decency not to go to a state school. But you know, just as well as I do, that it will be a benefit to you and the taxpayer for you to attend school. Why is this? Because taxation of the wealthy, followed by good public policy, can lead to increases in wealth for everyone and the number of high income earners. “The point of my article was not that if you tax income, you get less wealthy people, but that if you tax high income earners, you get less high income earners.” So, the term “wealthy” and the term “high income earners” are not the same? I guess we don’t have a problem with semantics, just the meaning of our words. Well, let’s see how much you are earning in a few years compared to how much you would be earning without your tax supported school. My guess is we have more people making more money because of tax supported schools than we would otherwise not have. You are a walking example of this. Do you really, honest now, do you really think that a person such as yourself would have had the same opportunities during the Gilded Age? If so, go take some history classes. Perhaps this is the worst part of a welfare state; people such as yourself get to benefit so much from it that you have time to trash it in a failed attempt to make yourself look insightful. A free lunch, indeed. I personally think it is fine that we are subsidizing your education; I only wish we were not subsidizing your hypocrisy.
“You might say, “Well, those rich greedy bastards…” No, sir, I would not. You claim your website is the voice of reason? All you have done here is put words in my mouth so you can attack a straw man. Where is the reason in this? Can’t you see that you are nothing but a talking point machine? Regurgitation is neither reasonable nor insightful.
“It seems to me that we have a problem at the moment with banks having enough capital. Imagine if the wealthy were allowed to save it so that we could all get loans. Wouldn’t that be grand?” Really? Really? If we decreased the tax we would forgo the revenue. Do you really want a higher structural deficit? Well, I guess we could decrease government services, but maybe you should go take a look at the Mundell-Fleming and the IS-LM models before you start arguing too much for that “fix”.
The problem with you is that you think you are making an economic argument. You are not. You have a political view that you use straw man economics to support. Libertarianism is of course a legitimate point of view and one that can offer vital insight in the political sphere. It is a shame that you have to resort to such childishness in what could have been a fruitful conversation. If you want to see what is wrong with society today all you have to do is re-read your last post. You don’t want to advance your knowledge or think about something from a different perspective. All you want to do is create phantoms and bogeymen to swat at so you can feel more justified in your political beliefs. Where is the reason in this?
I fully acknowledge that businesses and the wealthy do enormous good for universities and society as a whole. I do not think they are “greedy bastards”. I love entrepreneurs and I want more of them. I want people like you who are not necessarily the Vanderbilts and Carnegies to have as many opportunities as possible. Increased numbers of avenues- not created by the market- is the best way to increase the number of people with high incomes. Because the market may not always find a way the government via taxation must create those avenues. In order to do this, however, the government must tax the wealthy. Not for punitive reasons or because we think they are “greedy bastards”. Because the government can increase the number of high income earners by offering avenues to success that otherwise would not exist. This is how wealth is created. You want to see a place that does not have a good government or tax structure? Don’t go to the U.S., Europe, or Japan. Go to the developing world. Go to Sub-Saharan Africa. How much wealth is being created there? What is the chance of someone to become a high income earner in the developing nations versus that of the U.S.? We have a better chance of having high income earners because we have a good market based system *and* government. My point is that the private sector has a role to play, but so too does government and you must acknowledge this. Look into your state budget and find out how much it spends on higher education and compare that to the level of private donations. One of the reasons businesses invest is because the owners are alumni, their employees are alumni, or their future employees are current students. The alumni went to the school and are know building wealth for the firm. The school was supported and built by taxpayer dollars. The capitalist is able to increase his production because of the investment made by taxpayers. Taxes then can increase the number of high income earners.
You shoved words in my mouth perhaps because I was being too friendly and diplomatic. Let me be clear: Your model is too simplistic to be of any use. You cannot simply say that taxes lead to fewer people with high income. Again, how did the person get to the point that he was making $250,000? In addition to the market it was also government services, notably education and health care. Your model does nothing but create a simplistic view of the world so you can support a hollow political theory. You are making claims and excuses, not resorting to “reason”.
“I know you claim that taxing high income earners does not produce less high income earners; however, the empirical evidence is not on your side.” This is not true. First, you have not given me empirical evidence. You gave a model that I attempted to argue was too simplistic to offer any true insight into the world. I tried to point out that health care and education are two examples that can lead to people having the ability to increase income and lead to, in spite of taxation, the ability to become high income earners. Look into how much pay increased from 1950 to 1980 for the average worker compared to how much the rich were taxed and then compare the same numbers from 1980 to the present. Then compare this same time period to other developed nations. You will find that taxation of the wealthy does not lead to what you are claiming. Again, do you really believe that at the time of Vanderbilt, Mellon, and Carnegie, that everyone would have been able to have the same opportunities- let alone better- than they do today? No, and I am sure you know this deep down and that is why you get so annoyed by people like myself. Increasing the number of high income earners is not as simple as decreasing the level of taxation. You get more high income earners- like what you will be one day- because somebody somewhere invested taxpayer dollars in good public policy IN ADDITION TO THE PRIVATE MARKET.
First, I want to thank you for taking the bait. Clearly, it’s absurd for me to claim that you believe money left in the hands of the individual goes nowhere – it’s equally as absurd as your claim that I believe that government money goes nowhere. I decided that I’d let you rant like you did so that when I pointed this out, maybe it would hit home.
As for caring about conversation, how many unfounded ad hominem attacks did you make in your last post? I count somewhere around 8.
It appears that I am a student. Hmm…. Well, not exactly. I consider myself a perpetual student because I am always learning, but I am actually a businessman. As for your suggestion that I start a business, thank you very much: I already did that. I paid more in taxes into the system last year than the average person earns in a year, so I’ll consider that I wasn’t a “leech” last year.
And thank you for giving me the opportunity to discuss my business. I had earning expectations last year, which were in my mind when I considered hiring employees to take some of the burden off of me. I did the math and figured out that, with my tax burden, I wasn’t going to make enough to pay for an employee along with the earnings I expected to get out of the business. Thus, I didn’t hire an extra employee. I am a case in point against what you are saying: because I was taxed so heavily, I created LESS jobs that I otherwise would have. I wasn’t going to use my personal experience as anecdotal evidence, but since you brought it up…
You keep claiming that my argument is flawed, but all you ever manage to do is to say the equivalent of “wait, there’s friction you’re not taking into account.” Yes, granted, we have to deal with elasticities, substitution effects, etc. There are myriad economic factors which influence this simplistic model. However, that does not negate the fundamental truth of that model.
I agree that a 10 cent increase in bananas would cause a larger decrease in the quantity of bananas demanded than the quantity of gasoline demanded; however, at the margins, less gasoline will be demanded. Unless, of course, you’re making the argument that the price elasticity of demand is infinite, meaning that a 1% increase in the price of gasoline yields a 0% decrease in the quantity of gasoline demanded. We know that’s absurd because when the price of gasoline was $4 and $5 several months back, the quantity of gasoline demanded dropped substantially. We know that the demand for gasoline is inelastic, but it is not perfectly inelastic.
Now let’s talk about jobs. First, when you talk of your “demand” for a high paying job, you are talking about a labor market, which means that you are talking about supply. More to the point, price elasticity is the wrong economic concept to be discussing, because an increase in taxes will cause some people to drop out of the market entirely, which means that supply, not quantity supplied, is affected. You may be willing and able (this is questionable only because I don’t know your level of education, experience, etc. for the sake of argument, I’ll assume you’re able) to supply your skills for a high paying job even with a confiscatory tax policy, but, at the margins, less people who are able to supply their services for a high paying job will be willing to do so: maybe not you, maybe not me, maybe not other people reading this, but someone. For someone, it will simply not be worth the added work.
For example, think of a salesman, paid on commission. Let’s say this salesman has already earned $250K for the year, selling medical equipment that has the potential to save hundreds of lives. Each piece of equipment he sells earns him a commission, probably in the range of 5%. On a $100K piece of equipment, that’s $5K commission. Now, if he owes 50% in taxes (state + federal) on the next sale, he must work just as hard as he worked for the first 50 sales, but only gets half of the payment, net of taxes. Someone making that amount of money might decide that the extra work isn’t worth it – that he’d rather take a vacation for the rest of the year.
This then effects other workers at the company (like the guy who makes the machine) because sales go down, and some other people may lose their jobs. Then, of course, there’s the owner, who wants to make a certain amount of money. Faced with higher taxes and lower sales, he’s got to cut costs in order to put the money he expects into his pocket. Well, with lower sales, he might as well cut one of those high-paid scientists working on the machines. Then, of course, there’s the social costs of hospitals that could have saved more lives had this salesman sold them his product sooner.
Even if supply in the market for high-paying jobs were inelastic (which I can neither prove nor disprove), price elasticity of supply – as you’ve tried to present it – has no bearing on my claim that whatever you tax, you get less of.
By the way, there is a profound difference between high income earners and the wealthy, and it’s not a matter of semantics.
And, sir, you’ve got me all wrong: My political philosophies are based on economics, not vice versa.
First, let me offer my deep apologies for saying that you appear to be a student. I looked into the “authors” section and, while you were not there, everybody else seemed to be a part of an Arizona State group. In all honesty, and I don’t mean for this to be rude, but the arguments you have given me seem like something I was saying after freshman level econ classes. Later classes, notably various ones in public policy, have shown those arguments to be so simplistic that they are a waste of breath to even speak them. Perhaps that is the rub- I am speaking from a public policy perspective and you from a private perspective. This, however, says nothing to my point. Before I attempt to move this conversation forward, let me try to make my original argument against yours a bit clearer.
Allow me to backtrack just a moment to describe to you how I see your argument and what I take from it. First, you are dealing with taxation. So the question is centered on whether or not taxation causes a decrease in something. You lead this in with an example of cigarettes. You claimed this was a “sin tax” and its aim was to diminish sells. You then transition to the main point of the argument: that taxation will decrease the number of high income earners. I believe this is incorrect, simplistic, and incomplete.
If I was to choose a public policy that decreased- or did away with- tax on high income earners would it increase the number of high income earners? Let me ask you point blank: is this what you are saying? If so, then I have to disagree with you, notably in the long run. What I am trying to point out to you is that for a state to have a high number of high income citizens a number of things need to be in place in addition to the free market. The way to pay for the services needed to assure a lot of high income earners is taxation. Taxation can be a means to having more people as high income earners.
Geography seems to be on my side. Look around to the more conservative states in the U.S. and compare them to the more liberal states with high progressive taxes. Which states have higher income earners? Now, I know that you are saying it is relative, but I would still argue, totally anecdotally, but having been around the U.S. it seems that the rich are more focused in our cities. If taxation rates are lower in other states wouldn’t it make since that cities in more conservative areas would have an unusually high amount of people moving and setting up shop? While there are some people who choose to do this it is clearly not the majority.
Another thing I would like to point out is the use of “margins”. Will some people be worse off because of taxation, such as your own experience? Yes, that will be the case. However, this was not your original claim as I understood it. Your claim was that taxation decreases the total number of people who earn high incomes. My claim is that there are more people with high incomes, than say in a developing nation, because of the system we have in place; the system that is supported in part by taxation. I am arguing that services provided by taxation are the reason there is a number of high income people, well, at all. Some will lose out, but an even higher number of people will benefit.
Let’s forget about the welfare state for a moment. Let’s imagine a world with no government and no laws. Would it be possible to have high income earners in this world? Well, no, because people would steal from you, commit violent acts against you, and there would be no confidence in the market, and no investment. So, if we are to assure that business can be conducted we have to maintain some level of taxation to support the government. Taxation with good public policy creates a system that increases the number of high income earners.
My argument about you being a student at a state run school is, I believe, still valid. Did you go to a state school? Actually, let’s not even personalize this. We both know that state schools help people to earn more money. There are a large number of people who get MBAs, Law degrees, PhDs or even bachelors that end up in the higher income bracket because of their education. What I am trying to say here is that your claim that taxation only decreases the number of high income people is wrong. To say that people will not pursue there goals because of incentive is on the whole just plain incorrect. Do you really want me to believe that with university applications constantly increasing, especially grad school, that people are not pursuing higher income even in the face of taxation?
Let me go back to my physics analogy, because I think you missed the point. The problem you are trying to solve is “how fast does something fall out of an airplane” with F=MA. I am simply trying to point out that you have not brought in all of the variables. Yes, F=MA is correct, but it is not going to give you a correct answer. You need to readjust your model in order to get a good answer. You have models, like the ones you just gave me about labor that break down when other factors are brought in. There are factors that must be taken into account when creating good public policy. Your argument is about taxation and that invariably brings in political and societal factors. I am trying to say that a model that does not include this AND does not include the long term effects is absolutely meaningless and incorrect. Are you familiar with category-mistakes? Suppose I go to a university and ask someone to “Show me the university”. They begin showing me the grounds, the classrooms, the administration, dorms, cafeteria, bookstore, and library. Confused, I then ask “Yes, but show me the university.” I have made a category mistake. It seems you are doing something similar. From my point of view you have shown me the business building and now you’re trying to tell me I’ve seen the entire university. Is your claim correct? Well, ceteris paribus, and in the short run, maybe. However, all things are not equal and for good tax policy you have to take other things into account. This is what I mean when I say your argument is too simple to offer any value.
As for me “taking the bait”, what on earth are you talking about? If by “bait” you mean your statements, yeah, jeeze, I replied to your statements, er, I mean bait. Well, we both know what is going on here. You have to refer to it as a “rant” because then you can more easily dismiss the claims. Oh, wait, no, I want to win this argument so I’ll say something like “Oh you took my bait. I was trying to make it look like I was ranting, but that was just to get you to say “it’s equally as absurd as your claim that I believe that government money goes nowhere” and then say something like “see, you fell into my master plan”. So you thought you were setting out bait, but I was too quick and I was really the one who set the bait. Well, sir, I see your bait and raise you a na-na-na-boo-boo. I’m sorry if this is childish, but come on, falling for bait? The problem is that if you did set “bait” this is even more childish than saying you set it as bait so you feel better about yourself.
I must add, besides the stuff I see as a bit childish, it is a better discussion than most.