Top marginal tax rates, and why you should care about them

I think I was on How the World Works when I came across this article. Since, like most people in America, I don't make a staggering amount of money, I've paid little more than passing attention to the tax brackets at the very top of the scale. Sure, I knew the Bush administration had given a handout to these people, but I didn't realize how large the handout really was - and what the top of the pile really pay.

Turns out it's only a few percentage points more than I. Yeah, that's right. Someone taking home $10,000,000 a year without any deductions pays perhaps 8% more than I do, and I make less than $100,000. Quite a bit less. So, Joe the Plumber, eat your stupid 'conservative' heart out. I don't want to hear your whining. When you're making all that money, which you never will, you'll still be keeping most of it. Because, you know, that's best for everyone.

The gist of the article is that the best way to cap outrageous salaries is to increase the top marginal tax rate, and it's a compelling argument. Certainly, increasing the top marginal rate won't stop executives from getting compensated handsomely. There's many ways to reduce your tax liability, especially when you're so far past the subsistence level. However, I do think it'll stop the really egregious sums that are being taken home by these supposed supermen. As of now there is no incentive to reduce pay. None.

Since there's no chart at the above link, I tried to find one. In so doing I found an article from the WSJ, where they also note that actual revenues (at least, as a percentage of GDP) stay constant regardless of the top marginal tax rate. For the purposes of the article, at least, this is 'Hauser's Law'. Here's the graph:


Mr. Ranson opines:

What makes Hauser's Law work? For supply-siders there is no mystery. As Mr. Hauser said: "Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation."

Putting it a different way, capital migrates away from regimes in which it is treated harshly, and toward regimes in which it is free to be invested profitably and safely. In this regard, the capital controlled by our richest citizens is especially tax-intolerant.

Oh, really? Maybe the income controlled by our richest citizens is tax-intolerant because they can afford to hire armies of accountants? Perhaps you might consider the effects of crushing tax rates on the working poor, as well as the ultra wealthy. Aren't they also subject to the effects of incentive?

Only in the la-la land of mindless conservatism can this kind of logic stand. To these people, the work of the few people that take home millions is somehow more valuable than the work of those who take home tens of thousands. If these people stepped outside their ivory towers for a second, they'd realize that those empires are built on the backs of these workers, without whom these outrageous salaries would be impossible. Does an extra million or two really provide that much more incentive? How much harder can these people really work?

Really, all Hauser's law tells us is that it's only possible to get so much blood from a stone. Shifting the tax burden around doesn't affect how large a piece of the pie you get. But how big (how high?) is the pie? If shifting the tax burden affected the economy as a whole, it would only be apparent over time. I guess I'm the reverse of the supply-siders (or, let's call them what they are, the trickle-down theorists). I think that putting money in the hands of the consumer - who, after all, has driven our economy to such rarefied heights - is a far safer bet than giving increasingly large payouts to those who will gamble it away in risky investments.