All nice theory here. Except for the fact that people's behavior does not bear this out and never had. The people who are taxed the very most also work the very most. Your theory has no support. The people with lower tax rates work far less. Those are the actual facts so why are you talking about imaginary theories that are terrible at p…
All nice theory here. Except for the fact that people's behavior does not bear this out and never had. The people who are taxed the very most also work the very most. Your theory has no support. The people with lower tax rates work far less. Those are the actual facts so why are you talking about imaginary theories that are terrible at predicting actual behavior (unless it's to predict the opposite of what the theory says).
Careful. This is true in the short term but not in the long term. You have two things that cause people to work hard despite high tax rates.
One is that they are naturally the kind of people who work hard. They tend to face high tax rates because they are highly productive and hit high tax brackets. They are heavily motivated by non-financial considerations and may be relatively indifferent to taxes.
The other is path dependence. People get their lives set up - they invest in learning or in a business, they get married, they have children, they settle in a particular place, and so on - and those choices are either hard or impossible to reverse. When their tax rates go up, they may well decide that the least disruptive thing to do is to work harder, so that they replace the lost income and don't have to change any of the few other things they can change (like moving to a smaller house in a different neighborhood, moving their kids to new schools, etc., etc.)
In the long term, though - over generational timescales of 2 decades or more - you get profound behavioral changes. People invest less in learning and in businesses. Much less. Education makes less and less sense if all the increased income is going to be taxed away, as does starting a business. So now you have to subsidize education so there will be anyone with a high income to tax in the future. And all those easy gains from higher tax rates start to go away.
Taxing high incomes is like any other unhealthy behavior: the fun is all up front; the bill comes later. If all you do is look at the short term, it seems like a great idea.
I mean look I get why it happens. Im in the highest marginal tax bracket and I work all the time, way more than people with lower incomes. So does everyone else in this bracket. It's all doctors, lawyers, and CEOs...not people known for their fun flexible schedules. So I'm just saying, this theory is simply not true. For the reasons in your first paragraph.
Look I'd love if it was and there was a good reason for me not to pay six figures each year directly to the federal govt, but this is false theories and propaganda as far as I'm concerned. There is no evidence that tax rates make any difference on the behavior of workers, either high or low income. Investments is a different story.
I think "there is no evidence that tax rates make any difference on the behavior of workers" is a bit strong. There's plenty of anecdotal evidence that they do. A very simple example: if one married person earns enough to hit one of the higher tax brackets, their spouse is taxed at that rate on their first dollar of income. Dual-income middle-class parents have certainly told me it was a significant consideration when it came to deciding whether one of them (usually the mother) should take a career break when a child arrived. There's almost certainly been studies on that, not that I know where to find them. Most western countries keep their top marginal income tax rate just below 50%, presumably because they've found that higher rates drive behavior change even on a short timescale. There's also plenty of social-scale evidence consistent with behavior change associated with a pattern of high taxes and/or rich social benefits.
But it's hard to isolate the impact of marginal tax rates alone - excluding social benefits, subsidies to encourage education and investment that can offset high tax rates, etc. - over very long periods of time (decades) in a quantitative way, which is the most likely reason that satisfying quantitative, narrowly-focused evidence is not plentiful.
I think for the most part, once the basics are covered, people mostly care about making more money than others. Given that tax brackets are marginal and everyone is taxed the same on the the first several buckets, and it's only the "extra" income on top where rates go up, this results in it not having much impact on behavior. The example of a couple you mentioned is only relevant because they're planning on the child and one of them needing to scale back, but I think the behavior of their peers and people they feel the need to "keep up with" likely has more of an influence than tax rates. Because people don't want to have less money than those they feel are their peers.
So if me and my friends/neighbors all have a household income taxable in the highest bracket, and someone proposes raising that rate from 39% to 60%, I think most people's behavior will have more to do with what other's do, than the tax rate. Sure, it's only 40 cents left on the dollar for any additional work you do now, but that's still 40 cents more per dollar that you have more than everyone else. I don't think it would cause anyone to work less unless everyone across the board in that bracket did so, so everyone kept their same relative position. Sure, some people don't think that way, but they're not usually the highest earners or as competitive anyway. Most people who pay all their taxes via automatic W-2 withholding just don't really think much about taxes in the first place.
I work at a law firm so I have a lot of data on people's actual behavior over a long period of time, because I get reports every month showing precisely how many hours everyone works and exactly what their hourly rate is. Lawyers have a very clear more hours worked --> more money in their pocket structure to their compensation. It's only a small minority who adjust their behavior by working LESS once their hourly rate is higher, who decide "that's enough" because of higher tax rates. Most work MORE the higher their hourly rate, even though that will often tip them into higher brackets. It's still ultimately more money in their pocket at the end of the day.
Certainly there would be SOME point where this would tip into not seeming "worth it", but I think tax rates would have to be much higher to get there. If you can make an extra $5k a month post-tax, I don't think many people are going to much change their behavior or turn down that extra $60k a year just because those dollars are earned at 70% post-tax versus 60% post-tax. Though certainly they'd all say they prefer to keep the 70% post-tax.
That's really interesting. I have a friend who is a former - very successful - consultant who similarly believes people are primarily motivated by status rather than absolute wealth, and that anyone with the ability to spend on status goods (Rolex, Ferrari, etc.) should have most of it taxed away from them because it's all just status signaling, which they could do with a fraction of the income. No doubt most people have an element of relative status seeking. But top-tier consulting firms, like law firms, are pyramid hierarchies where anyone who is motivated by a mix of values is going to be selected out (into "real world" careers that allow for a mix of values). I accept that you are both reporting accurately what you see in your worlds, but suggest that you consider the possibility that the world you see is extremely unusual.
I have encountered yet another worldview that also considers taxes to be an afterthought. In that worldview (someone who worked at a university, where taxes are lower - but incomes also) the motivation was actually "having power over other people's lives". Again, I have no doubt that's a real thing, but I don't think it's terribly common - far more people want control over their own lives.
You discounted the couple having a child as being a particular situation, not typical. I suggest to you that, in fact, it's far closer to typical than the behavior of people who have made it - or aspire to - in a law firm.
All nice theory here. Except for the fact that people's behavior does not bear this out and never had. The people who are taxed the very most also work the very most. Your theory has no support. The people with lower tax rates work far less. Those are the actual facts so why are you talking about imaginary theories that are terrible at predicting actual behavior (unless it's to predict the opposite of what the theory says).
Careful. This is true in the short term but not in the long term. You have two things that cause people to work hard despite high tax rates.
One is that they are naturally the kind of people who work hard. They tend to face high tax rates because they are highly productive and hit high tax brackets. They are heavily motivated by non-financial considerations and may be relatively indifferent to taxes.
The other is path dependence. People get their lives set up - they invest in learning or in a business, they get married, they have children, they settle in a particular place, and so on - and those choices are either hard or impossible to reverse. When their tax rates go up, they may well decide that the least disruptive thing to do is to work harder, so that they replace the lost income and don't have to change any of the few other things they can change (like moving to a smaller house in a different neighborhood, moving their kids to new schools, etc., etc.)
In the long term, though - over generational timescales of 2 decades or more - you get profound behavioral changes. People invest less in learning and in businesses. Much less. Education makes less and less sense if all the increased income is going to be taxed away, as does starting a business. So now you have to subsidize education so there will be anyone with a high income to tax in the future. And all those easy gains from higher tax rates start to go away.
Taxing high incomes is like any other unhealthy behavior: the fun is all up front; the bill comes later. If all you do is look at the short term, it seems like a great idea.
I mean look I get why it happens. Im in the highest marginal tax bracket and I work all the time, way more than people with lower incomes. So does everyone else in this bracket. It's all doctors, lawyers, and CEOs...not people known for their fun flexible schedules. So I'm just saying, this theory is simply not true. For the reasons in your first paragraph.
Look I'd love if it was and there was a good reason for me not to pay six figures each year directly to the federal govt, but this is false theories and propaganda as far as I'm concerned. There is no evidence that tax rates make any difference on the behavior of workers, either high or low income. Investments is a different story.
I think "there is no evidence that tax rates make any difference on the behavior of workers" is a bit strong. There's plenty of anecdotal evidence that they do. A very simple example: if one married person earns enough to hit one of the higher tax brackets, their spouse is taxed at that rate on their first dollar of income. Dual-income middle-class parents have certainly told me it was a significant consideration when it came to deciding whether one of them (usually the mother) should take a career break when a child arrived. There's almost certainly been studies on that, not that I know where to find them. Most western countries keep their top marginal income tax rate just below 50%, presumably because they've found that higher rates drive behavior change even on a short timescale. There's also plenty of social-scale evidence consistent with behavior change associated with a pattern of high taxes and/or rich social benefits.
But it's hard to isolate the impact of marginal tax rates alone - excluding social benefits, subsidies to encourage education and investment that can offset high tax rates, etc. - over very long periods of time (decades) in a quantitative way, which is the most likely reason that satisfying quantitative, narrowly-focused evidence is not plentiful.
I think for the most part, once the basics are covered, people mostly care about making more money than others. Given that tax brackets are marginal and everyone is taxed the same on the the first several buckets, and it's only the "extra" income on top where rates go up, this results in it not having much impact on behavior. The example of a couple you mentioned is only relevant because they're planning on the child and one of them needing to scale back, but I think the behavior of their peers and people they feel the need to "keep up with" likely has more of an influence than tax rates. Because people don't want to have less money than those they feel are their peers.
So if me and my friends/neighbors all have a household income taxable in the highest bracket, and someone proposes raising that rate from 39% to 60%, I think most people's behavior will have more to do with what other's do, than the tax rate. Sure, it's only 40 cents left on the dollar for any additional work you do now, but that's still 40 cents more per dollar that you have more than everyone else. I don't think it would cause anyone to work less unless everyone across the board in that bracket did so, so everyone kept their same relative position. Sure, some people don't think that way, but they're not usually the highest earners or as competitive anyway. Most people who pay all their taxes via automatic W-2 withholding just don't really think much about taxes in the first place.
I work at a law firm so I have a lot of data on people's actual behavior over a long period of time, because I get reports every month showing precisely how many hours everyone works and exactly what their hourly rate is. Lawyers have a very clear more hours worked --> more money in their pocket structure to their compensation. It's only a small minority who adjust their behavior by working LESS once their hourly rate is higher, who decide "that's enough" because of higher tax rates. Most work MORE the higher their hourly rate, even though that will often tip them into higher brackets. It's still ultimately more money in their pocket at the end of the day.
Certainly there would be SOME point where this would tip into not seeming "worth it", but I think tax rates would have to be much higher to get there. If you can make an extra $5k a month post-tax, I don't think many people are going to much change their behavior or turn down that extra $60k a year just because those dollars are earned at 70% post-tax versus 60% post-tax. Though certainly they'd all say they prefer to keep the 70% post-tax.
That's really interesting. I have a friend who is a former - very successful - consultant who similarly believes people are primarily motivated by status rather than absolute wealth, and that anyone with the ability to spend on status goods (Rolex, Ferrari, etc.) should have most of it taxed away from them because it's all just status signaling, which they could do with a fraction of the income. No doubt most people have an element of relative status seeking. But top-tier consulting firms, like law firms, are pyramid hierarchies where anyone who is motivated by a mix of values is going to be selected out (into "real world" careers that allow for a mix of values). I accept that you are both reporting accurately what you see in your worlds, but suggest that you consider the possibility that the world you see is extremely unusual.
I have encountered yet another worldview that also considers taxes to be an afterthought. In that worldview (someone who worked at a university, where taxes are lower - but incomes also) the motivation was actually "having power over other people's lives". Again, I have no doubt that's a real thing, but I don't think it's terribly common - far more people want control over their own lives.
You discounted the couple having a child as being a particular situation, not typical. I suggest to you that, in fact, it's far closer to typical than the behavior of people who have made it - or aspire to - in a law firm.
I may be wrong, of course; it happens.
Good discussion! Thanks.
You make a good point. Unfortunately, our host rarely reads comments, so he is unlikely to see it. Maybe you should email him directly.
I think he is oversimplifying a bit. Earning or doing less is not the only way to respond defensively to tax increases.