Tuesday, February 28, 2012


Christina and David Romer's new paper, “The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era,” says that the incentive effects of marginal tax rates are
consistently positive, small, and precisely estimated
This really should not be a surprise. Most people would rather be rich than poor, but most people get up and go to work in the morning not because they want to be rich, but because they must or because they love their work. People who love their work will work harder as they get richer.

James Kwak notes that these results are based on the richest of the rich, the top .05% of the population and hence the ones who would find it easiest to slack off if they decided that work isn't worth it; the rest of us would have even less choice
To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent.
Should we raise taxes on the wealthy?

The normative aspect of taxation is genuinely difficult. I think most people who oppose higher taxes on the wealthy do so for ethical reasons. They feel it would be unjust to people who have worked hard for their wealth, and have benefited others. I often feel similar scruples, and certainly we shouldn't be taxing people merely because we can.

However, I also agree with Hayek on desert. The world is full of intelligent, hard-working, decent people. For every successful man who we admire for his intelligence and energy there are a dozen who we haven't heard of but who are equally worthy in any meaningful sense. The market rewards you not for what you have done, but for what "it" wants you and others to do more of. Certainly I don't see any good reason why the extremely wealthy should pay tax at a lower rate than those poorer than them.

The doubts which I do have are about government's ability to serve our best interests even if they wish to, though the solution to that would be to avoid overcomplicating government. Whatever your opinion of the "right" rate of tax to apply to the extremely wealthy, these estimates should make you revise that upwards.

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