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June 29, 2010

Comments

McTx:(the trade off being that if I underpay my employees, they jump ship at the first opportunity and you can't hire quality people by paying chump change)

Not when unemployment is at 10%, you don't. That's the point.

The paperwork required by local, state and federal entities is astonishing. Add to that the paperwork generated by insuring, banking etc. needs that any small business requires and you have at least one full time person who does nothing but track paper, all of which the owner has to oversee.

This is true, but has nothing whatever to do with taxes, or even with just government, because much of the paperwork, as you mention, is due to private industries like banking and insurance. Do you really think banks and insurance companies wouldn't insist on paperwork if there were no government? (even assuming they'd exist in any form without government to set the rules of a market and provide a secure society) Would professional liability disappear with less government? And if we got rid of professional liability, do you think that would be a good thing?
Paperwork is, incidentally, one of the major attractive features of single-payer health insurance, especially for doctor's offices that have to deal with upteen copies of nearly the same paperwork for different insurance companies.

They will do, as they've done all of their lives to achieve a degree of success and that is adapt. It is fantasy to think that the work aspect of successful professional and craft people is easy.

I think "successful professional and craft people" is overly broad. Most successful professionals aren't the ones raking in the huge wads of dough at everyone else's expense, that's the financial skimmers. But I'm always struck by these claims of how businesspeople are adaptive, creative, tough, brilliant, brave, etc, etc, etc, and then how when there's any chance they might have to adapt to new situations like any regulation or taxes, they start hysterically claiming how not polluting, or not charging 500% interest, or not being able to pretend their income isn't really income, or whatever, will destroy them, drive them out of business, and kill kittens. Seriously? If they're as tough and creative and adaptable as they always say they are, then STFU and figure out how to adapt to it.

If my taxes begin to approach 50%, I simply shut down my firm, put 10 people on the street, sell our primary residence and practice law out of my satellite office at what will hopefully, someday be our retirement home.

Marginal taxes are different than total taxes. Which one are you talking about here?

And seriously, most people wouldn't walk away from their job and drastically drop their incomes just because they get taxed a little bit more the top portion of their incomes that are already several times more than most Americans will ever make.

John Galt was a coward, and society would have run along fine without him and his kindergarten "take our ball and go home!" crew.

Jes--name calling is unproductive. I'll trade my US status for European levels of debt, unemployment and stagnation any day of the week. I free load on my own effort, no one else's. I don't just pay taxes, I employ and insure 10 other people. You call that freeloading?

Ajay--you are wrong. I can do very well on my own. I do better with a bigger operation, but the hassle/risk/tax factor makes it a balancing act. Tip the balance too far in favor of major cutbacks and that is what you will get.

Nate--you speak from experience? Not likely. I can work a lot less and make a more than adequate living. See my comment to Ajay above.

The US had far higher income tax rates in the past without a revolt on the one hand, on the other the mere idea of an income tax drove people to (at least near) revolution at other times (a minority still considers a federal income tax an unconstitutional abomination, e.g. the authors of the Texas GOP party platform). People seem very able to adapt.

McTex:

If what you say is true, you would be the exception to the rule, and your departure from the work force would be a statistical blip. Unfortunate for the handful of your employees let go, but with the vast benefits outweighing the negatives.

Though, let's be certain, I'm not suggesting a 50% tax rate on anyone, and since they are marginal rates, it would have to be a 60% tax rate and you would have to be making a ton of money to bring it to 50%.

I employ and insure 10 other people. You call that freeloading?

So you benefit not merely by the services provided to you by your country, but by the services provided by your country to ten other people whose labour you benefit from.

Yet you're unwilling to pay for those benefits. Yes, I do call that freeloading.

I'll trade my US status for European levels of debt, unemployment and stagnation any day of the week.

Good plan. E-mail me for advice on how to emigrate to an EU country: I may be able to help. Wait a minute... I bet that was a typo, and you meant you WOULDN'T trade your US status, not even if it meant swopping US levels of debt, unemployment, and stagnation for European ones...

McKinneyTexas: suspend the employee side of FICA for people earning less than 150K a year and do so for two years. And, cut the s**t out of spending. Start with the Dept of Agriculture and end fricking crop subsidies.

So you want to cut payroll taxes (~$940 Billion) roughly in half and also cut roughly $20 billion in expenditures, making the deficit worse by approximately $450 Billion dollars.

Obviously you've put a lot of thought into this.

@McKinneyTexas:

If my taxes begin to approach 50%, I simply shut down my firm, put 10 people on the street, sell our primary residence and practice law out of my satellite office at what will hopefully, someday be our retirement home.

At which point the clients that would have gone to your firm will still be seeking legal representation, and will take their business elsewhere.

The firms to which they take their business will then see an increase in revenues, which will probably cause them to need to hire people. It's not free to do so, of course; some of the fee income that would otherwise have gone into their salaries will have to go into the costs of advertising the positions, interviewing candidates, and the inevitable administration involved in taking on staff. It would be easier for all concerned if you didn't throw your toys out of the pram, but it's not quite the ruin you portray.

That's the bad news for the owners of non-geographically mobile businesses (the service sector, for instance) who try to use their staff's jobs as blackmail against any regulation. The same subtext that keeps people in bad jobs applies to them: you are replaceable.

It seems to me that McK is telling the truth when he says a top marginal rate of 50% would be enough for him to fold up his tent and fall back to a simpler, less renumerative but still more than adequate solo practice.

It sounds like he's paid his dues, and is now in a position where those choices are available to him.

Further, my guess is that he isn't really that unique. There are, I think, lots of folks like him in professional small business and trades.

To me it makes sense to distinguish between people like McK, who is a hands-on participant in addition to being a capital investor, and folks who are not hands-on, and who have no real role or responsibility in the actual creation of value.

The distinction is probably less obvious in, frex, the financial sector, but it still exists there.

Whatever we do (if anything) in terms of tax policy, it doesn't make sense to discourage the activities of people who are active participants in the productive economy.

Another topic: back in the day when we had very high top marginal rates, they generally applied to high-to-very-high income levels.

The 91% top rate that prevailed through the 50's into the very early 60's kicked in at 400K, which at that time was a lot of money.

To be concrete: $400K in 1960 is almost $3 million today. I don't know McK's specific circumstances, but *in general* the kinds of folks we are talking about -- hands-on proprietors of small local businesses -- are not going to pack it in if the marginal rate on incomes above something like $3M a year goes up to numbers like 40 or 50%.

I could be wrong, but I don't think so. Most folks like that would be overjoyed to make $3 million a year, and would be unlikely to fold up their tent if their three-million-and-first dollar was taxed at, frex, 45 or 50% rather than 35%.

And for the record, I'm not looking to "soak the rich", what I'm looking for is for the cost of putting the nation on a sound financial footing to be shared across all sectors in something like a fair way.

Eric,

Raising marginal tax rates to 50% at say 1M dollars would impact something, but it would probably not cause a tidal wave of exiting professionals. At 250k that is aa different story. There are, in fact, many in that range working 70-90 hour weeks that would have to completely reassess the value of that last 20k in take home pay.

That said, it also wouldn't solve our problems. At a high level(rounding), with impending retrenchment of the economy and the threat of financial collapse on the horizon, Americans spent over a trillion dollars less in 2008 than in 2007. They had a negative net borrowing and did not spend much more in 2009. I suspect the impact of a similar trend is impacting markets currently in 2010. The government spending that tax money won't put that trillion dollars back in motion in our economy, and paying down the debt with it would be a long term fix while potentially exacerbating the current problem.

There is a fundamental change in the spending habits of America. From the late 90's through 2007 we spent every penny we made and borrowed even more. In the late 90's the savings rate had ddroppedd from the 10% plus in the late fifties (and close to tthata in the 60's) to less than 3% of personal income. We didn't spend our childrens money, we spent our parents savings and then some. Now we have to pay our own way.

All of that was supported by long term, stable employment over a thirty year period, where people became complacent about the need to save or manage debt now. The fear of being unemployed simply was not real for most people. Rainy days were when your second car had to go in the shop.

Even very lower middle class people had been employed consistently for long periods, although rarely for the same employer for long periods. Middle class and up people began to leverage their income with the expectation that it would minimally remain consistent in a slowly expanding economy.

That wasn't the bankers or the skimmers or the hedge fund bettors, that was the social impact of thirty years of continuous slow growth with minor setbacks. 2008 scared the bejesus out of us, so we killed the economy by stopping spending.

It is not clear to me that a slow return to an economy that is sustainable without all of that leverage is a bad thing. Government should ease the burden on the incapable, encourage the discouraged, foster investment in long term investments in infrastructure.....

But it can't reduce unemployment in a sustainable way by taxing massively (note the massively, a few points on any marginal rate disappears in the maze of a paycheck after the first few) and spending because it is practically impossible to target spending to match the skills of the unemployed outside direct government jobs (Firefighters, police, etc.)


BTW all statistics refernced here are here where I seem to find myself going back and trying to assess the impacts of varying policies over time on the behavior of Americans. The above are some of my tentative conclusions, mostly strong opinions weakly held and waiting hsh response to the validity of the statistics.

At which point the clients that would have gone to your firm will still be seeking legal representation, and will take their business elsewhere.

True, but given the onerous tax load, remaining employers will require more work out of less employees to make what they would have made previously. The result will be that some but not all of my former employees will find work, but it is also likely they will find it at a lower wage. As businesses downsize, the need for satellite professional services will shrink. There will be less demand from my client base and I will keep the best of my base for my own, somewhat reduced income. So, how much remainder there is to be absorbed by others is probably a lot less than you think. The ripple effect of punitive taxation across the private sector will generally produce pressure on employers to reduce costs to maintain earnings. The easiest cost cutting measures is to trim labor with all of its increasingly attendant costs (matching FICA, insurance, paid leave, etc).

The US had far higher income tax rates in the past . . . People seem very able to adapt.

Productivity, lifestyle and GDP were significantly more modest in the long gone high tax days. Recall then that the high taxes supported primarily a defense budget and minimal social spending. And even then, government ran a deficit more often than not.

Though, let's be certain, I'm not suggesting a 50% tax rate on anyone

Then I'd likely remain in business. But you are mistaken if you think tax rates don't drive human behavior. Actually, you do recognize this fact even if many others here do not--at the margins, there is a real cost/benefit analysis. At the small business/professional/craft margins, the trade-offs include administrative/tax/liability/risk load. Push these out of balance, and people who worked to earn a surplus will scale back to a more modest surplus or break even.

It seems to me that McK is telling the truth when he says a top marginal rate of 50% would be enough for him to fold up his tent and fall back to a simpler, less renumerative but still more than adequate solo practice.

It doesn't seem so for me. In 1993, for example, the top tax bracket in the US went from paying 31% to paying 39.6%. Was there a wave of people "folding up their tents" in response?

At 250k that is aa different story. There are, in fact, many in that range working 70-90 hour weeks that would have to completely reassess the value of that last 20k in take home pay.

Really? How many people are on an hourly salary that puts them at 270K? Such that they will cut out the hours associated with that last 20K?

I just don't think hours equate to income in such a way at that high a tax bracket.

And, again, I'm not proposing a 50% marginal rate on income over 250K. We don't even need to go that high, at that low a threshold.

I bet that was a typo, and you meant you WOULDN'T trade your US status

Jes, correct. I would stay here. I would be a lot more European. I wouldn't work much, but I wouldn't spend much either. I'd probably travel more, maybe even come over to England and harass you in person.

"Really? How many people are on an hourly salary that puts them at 270K? Such that they will cut out the hours associated with that last 20K?"

I would think that many people in that salary range have management responsibilities that drive the need to work those kinds of hours, and many could take jobs or work by the hour, where their work/life balance would be significantly improved. You were just kidding about hourly right? You are a lawyer right?

To be concrete: $400K in 1960 is almost $3 million today. I don't know McK's specific circumstances, but *in general* the kinds of folks we are talking about -- hands-on proprietors of small local businesses -- are not going to pack it in if the marginal rate on incomes above something like $3M a year goes up to numbers like 40 or 50%.

Russ, thanks for getting back to the substance. As an aside, comparing the early 60's with present times is problematical. Different economy, different federal, state and local roles, a much higher marginal rate with a much smaller government. Today we see just the opposite. Much smaller rates, a comparatively huge economy, nearly double the population and much more government across the board. My point is that 400K today really isn't 3mm. A homeowner making 400K and paying state and local taxes plus income tax pays nearly 50% of his/her income in taxes one way or the other. Plus, we fund our own retirements. No one helps or matches. Not a pity party, but when you are on your own, that's the way it is.

You are correct that most people not earning and who never expect to earn 400k a year would be overjoyed if they could do so. Generally, though, there is a reason why some people make that kind of money and others don't. It's not some kind of economic Darwinism thing, rather, it's risk tolerance.

My overall point is simply this: a tax burden of X + 1 = the point at which some people begin scaling back. Increase the 1 to 3 or 5 or 7, and more and more people at the higher margins will scale back somewhere, whether its reducing hours or cutting payroll. When X is reached--i'd say given current circumstances, the Clinton rates are probably close to X with no added FICA penalty on higher earners--spending has to be reduced.

So you want to cut payroll taxes (~$940 Billion) roughly in half and also cut roughly $20 billion in expenditures, making the deficit worse by approximately $450 Billion dollars.

Yes, you are correct. The 450 billion hit is slightly more than half of the stimulus package passed last year, much of which remains unspent. But, your math is correct.

Would it really be a bad thing if instead of lawyers etc working 70-90 hour weeks in pursuit of an extra 20K, when they're already making five times the median income for average Americans? Ohnoes! They...work a few less hours, have time with their families. And so then to cover the work, there's room for more lawyers at those firms, or room for young lawyers to make new firms, or whatever. And if it keeps the banksters from working 70-90 hours inventing new ways to rip off their clients since they'll only make an extra 500K instead of an extra million, so what?

McTx: Maybe you would quit. Sounds like you've got enough resources to be ready to at least semi-retire anyway. Most of us other professionals (engineer here) wouldn't, what with still having student debt to pay off, or getting into our professions for reasons other than money, or so on. Maybe we wouldn't put in 70-90 hours for that extra $20K, but like I said, that wouldn't be so bad. Also, if we raised the MARGINAL tax rates on incomes over $250K, and added higher MARGINAL tax breaks at like $1M, $5M, etc, then it wouldn't affect most small business owners (many of whom I've known don't make that much from their businesses as income), and it'd give our country the ability to say, fix infrastructure, cut the scary deficit so people would have to find another reason to freak, and maybe get people back to work so they'd be able to afford houses, and lawyers, and all the other things that used to be the American Dream before the American Dream became "not losing your second job so you can pay the mortgage."

Seriously, if you're making enough in society to be taking home five times what the median American makes, then you can bloody help pay for the society that let you succeed like that. The schools, roads, defense, markets, legal enforcement, and all the rest.

I would think that many people in that salary range have management responsibilities that drive the need to work those kinds of hours, and many could take jobs or work by the hour, where their work/life balance would be significantly improved.

Explain. I don't think so at all.

You were just kidding about hourly right? You are a lawyer right?

Huh? Is that some kind of cruel joke? I work in a law firm, so I work as many hours a week as necessary to get the work done. Just about every single lawyer in every single law firm does the same. Lawyers get paid a salary, not an hourly wage. The billable hours go into a collective fund that pays salaries/expenses.

I have absolutely ZERO ability to tell my boss that I'm cutting back on my hours, and that he can pay me less. He would end up paying me ZERO dollars and handing me a pink slip. That is the same for just about every lawyer in a firm.

If I were a solo practitioner, I suppose I could try to cut back on hours, but if I did, my clients would begin using other lawyers/law firms, and that would seriously jeopardize the longevity and viability of my practice. Lawyers have to be fiercely territorial and protective of clients. That is their lifeblood (that we suck like vampires ;)

More likely, I would either continue to do the work myself and curse the slightly higher marginal tax rate on the money above the 250K threshold, or hire more young associates to do it for me, and keep my own income lower than 250K.

I would not, however, alienate and turn away clients in a curious effort to massage my hours worked into some chimeric sweet spot for tax purposes.

I mean, even if I tried that, and a big case/matter came in, I could undue those hours-management efforts in a month of hard work necessitated by the case/matter.

And if I did turn away work, someone else would do it, and the net damage to the economy would be ZERO.

That is fantasy stuff, not the real world.

McKinney: Generally, though, there is a reason why some people make that kind of money and others don't.

Yes. If your parents were well-off, so are you likely to be: if your parents were not well-off, you won't be. The US has, compared to most European countries, incredibly low levels of social mobility.

You identify this as "risk tolerance", and it's true: someone with family money behind them is much better able to take the kind of business chances that someone who's constantly struggling to pay the rent and keep food on the table.

It doesn't seem so for me. In 1993, for example, the top tax bracket in the US went from paying 31% to paying 39.6%. Was there a wave of people "folding up their tents" in response?

In 1993, I had one kid at an expensive private university and the other in an expensive private school. Not the way I grew up, but the plan was to do more for our kids than I had coming up. I didn't have a choice, I had to work to do for my children what seemed right at the time. I also had a boat load of other commitments. All of those are gone, as Russell correctly inferred. What necessity required of me then and what is required today are completely different. Finally, 39% is not 50%.

Really? How many people are on an hourly salary that puts them at 270K? Such that they will cut out the hours associated with that last 20K?

Eric, I am pretty sure Marty was referring to fee for service professional-type taxpayers, whose income is tied to the hours they work. I suspect this is a measurable percentage of the 250K-900K range of earners.

"I have absolutely ZERO ability to tell my boss that I'm cutting back on my hours, and that he can pay me less. He would end up paying me ZERO dollars and handing me a pink slip. That is the same for just about every lawyer in a firm"

And just about every successful professional I know. However, there are, as you note with "being on my own", alternatives for even those successful professionals that would require less hours. For people "on their own" they might even choose to have a few less clients. I am not sure why this concept is hard unless for you, perhaps, like me, a 70 hour work week just seems the way people should work?

Yes. If your parents were well-off, so are you likely to be: if your parents were not well-off, you won't be. The US has, compared to most European countries, incredibly low levels of social mobility.

Que? Seriously? My dad retired from the navy and taught high school. When he was 61 he went to law school (he was actually 2 years behind me at the same school). My mom never worked more than part time. As for upward mobility, i'll let someone else do the research, but you are in serious fantasy land. Serious.

Eric, need drives effort unless you just like making money for the hell of it. I need X amount to shut it down and when I get there, I'll retire. It's a means to an end, not an end in itself. It is not a fantasy that a lawyer might scale back from say, 2400 a year billable, to 1800, giving the work to a partner or a colleague, if the last 600 hours was only half for the lawyer's benefit.

You identify this as "risk tolerance", and it's true: someone with family money behind them is much better able to take the kind of business chances that someone who's constantly struggling to pay the rent and keep food on the table.

I missed this one. Are you totally clueless or what?

However, there are, as you note with "being on my own", alternatives for even those successful professionals that would require less hours.

Going on your own is an extremely, extremely risky endeavor. Doing so with the intention of working fewer hours makes the endeavor even riskier - as you normally would have to work harder in the beginning to build up your practice.

The vast, vast, vast majority of people would not undertake such a risky gamble because they hope to find a sweet spot in which they are earning less than 250K because the marginal rate on amounts over 250K were raised.

For people "on their own" they might even choose to have a few less clients.

I suppose, but then those clients would find and pay other lawyers, and the effect on the economy, and overall tax revenue would be: nothing.

Finally, 39% is not 50%.

True, but no one is proposing 50%, so that is kind of a straw figure. Also, people are proposing additional brackets above 250K, so that threshold is a bit strawish too.

McTx: My dad retired from the navy and taught high school. When he was 61 he went to law school (he was actually 2 years behind me at the same school). My mom never worked more than part time.

If you're running your own legal business and close to retirement, odds are when your parents worked and you went to school was before the past 30 years of stagnation.

The highest marginal tax rate in the 1950s was 91%.

No one worked.

Hewlett fired Packard and sold shoes out of the back of a second-hand Rambler, every other week.

Warren Buffet didn't get out of bed until 2001.

Bill Gates emerged from the womb, took one look around, and told his mother that his goal was to be the next Maynard G. Krebs.

Bonzo threw his career over and laid off his entire crew, including Ronald Reagan, and became an effing astronaut where the money was, except that Federal employees pay taxes too, so by choice Bonzo is still in orbit on leave without pay.

The Real McCoys let their truck farm lie fallow and moved into bunk with Pepino, which was fine with him because he had a little tax-deductible crush on Hassie.

Texas seceded from the Union and when John F. Kennedy visited to offer, as incentive for returning, a lower marginal tax rate (79%, I believe), they shot him in the head.

Texas attorneys, who Shakespeare suggested WE put out of their misery, shot THEMSELVES.

Eric, need drives effort unless you just like making money for the hell of it.

I live in NYC near Wall St. That is the environment there, and on LI where I grew up.

I need X amount to shut it down and when I get there, I'll retire. It's a means to an end, not an end in itself.

There's a reason I like you.

It is not a fantasy that a lawyer might scale back from say, 2400 a year billable, to 1800, giving the work to a partner or a colleague, if the last 600 hours was only half for the lawyer's benefit.

Keep in mind, that it's not "half" for the lawyer's benefit. We're talking about "half" vs. 35-40%. Currently, the lawyer doesn't keep everything of those last 600 hours. We're talking about raising the marginal rate for those hours from 35-40% to 50% (although I'm not sure, again, how we got the 50% number).

Also, in a firm, the lawyer is not compensated by the hour, and can't give those hours away, unless there is a unique model.

Even if they could just give the hours to a colleague, and that hourly loss was reflected directly in pay, so what?

The colleague would get paid for those hours, and there would be zero impact on the economy or tax revenue.

So, really, why should we care?

The highest marginal tax rate in the 1950s was 91%.

This point should be reiterated.

People worked, got wealthy and the economy boomed during this period.

The highest marginal tax rate in the 1950s was 91%.

This point should be reiterated.

People worked, got wealthy and the economy boomed during this period.

Correct. And the highest marginal rates kicked in at very high levels of income.

For middle class people, the rates haven't changed that dramatically since then. Mostly, the upper brackets just went away.

This is a damned good country to be rich in.

"People worked, got wealthy and the economy boomed during this period."

And, as less people worked and the economy boomed less, pretty much all economists agreed that part of the problem was....the top marginal tax rates. That's called addressing a trailing effect.

Where is the evidence that less people worked? Or rather, that the trend towards working fewer hours that has been ongoing for at least a century increased its rate during the high-tax period?

Marty,

Consensus was that the rates needed to be cut. However, the cuts have gone too deep. After JFK hacked them down big time, they were cut further until Bush brought them far too low.

As for upward mobility, i'll let someone else do the research, but you are in serious fantasy land. Serious.

Actually, no, she's correct, and luckily the research has already been done. Here is a good starting point:

The key findings relating to intergenerational mobility include the following:

Children from low-income families have only a 1 percent chance of reaching the top 5 percent of the income distribution, versus children of the rich who have about a 22 percent chance.

Children born to the middle quintile of parental family income ($42,000 to $54,300) had about the same chance of ending up in a lower quintile than their parents (39.5 percent) as they did of moving to a higher quintile (36.5 percent). Their chances of attaining the top five percentiles of the income distribution were just 1.8 percent.

Education, race, health and state of residence are four key channels by which economic status is transmitted from parent to child.

African American children who are born in the bottom quartile are nearly twice as likely to remain there as adults than are white children whose parents had identical incomes, and are four times less likely to attain the top quartile.

The difference in mobility for blacks and whites persists even after controlling for a host of parental background factors, children’s education and health, as well as whether the household was female-headed or receiving public assistance.

After controlling for a host of parental background variables, upward mobility varied by region of origin, and is highest (in percentage terms) for those who grew up in the South Atlantic and East South Central regions, and lowest for those raised in the West South Central and Mountain regions.

By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults.

Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.

But I'm sure you have a touching anecdote that completely disproves this research and and lets you accuse the authors of being in "serious fantasy land."

That's called addressing a trailing effect.

Yes, a twelve-year-long trailing effect.

And then Kennedy "hacked them down big time" to 77%, then to 70%.

And they stayed at 70% (50% for earned income) through 1980.

Then Reagan, that crazy reactionary [email protected], hacked them all down to 50%.

Bush I was my favorite, imposing a higher marginal rate (33%) on the *second* highest bracket, with the highest bracket taxed at 5% less.

With the exception of crazy man Bush I, the top marginal rate hasn't been as low as it is now since 1931.

That's a damned long trail.

My druthers, we'd quit worrying about all of the 11th dimensional triple bank shot side effects of the top marginal rates. I don't see, and no-one has ever been able to show me, a reliable correlation between the top marginal rate and the overall health of the economy.

Taxes are for raising revenue, not micro-engineering the macro-economic environment. Figure out how much money we need, construct a tax regime that causes the least overall pain, and be done with it.

My two cents.

Eric,
I have an intuitive bias to agree that at some income level they are too low. What I can't find is a fact driven proof of what "too low" means, outside of the "we (the government, that is us) need more money right now" discussion.

For people "on their own" they might even choose to have a few less clients. I am not sure why this concept is hard unless for you, perhaps, like me, a 70 hour work week just seems the way people should work?

It's not that the concept is hard. It's just not of sufficient magnitute to matter.

Whatever "magnitute" is. That might be a hard concept.

I should add that I can't say as a matter of fact that lots and lots of people who are on their own won't cut back on productive work. I just don't think that will happen. I think some number will, but that the number won't be large enough to affect aggregate output to an appreciable degree. I could be wrong, but that's my position, not that no one would decide to cut back on their work because of some reduced marginal return. So, the concept = not hard, but also = doesn't really matter.

McKinney: but you are in serious fantasy land. Serious.

Phil has already cited the refutation, but I'll add that "serious fantasy land" is inhabited by the people who believe that someone whose parents are using food banks and food stamps to keep their kids from going hungry, working three minimum-wage jobs to pay the rent, has exactly the same chance of going to college and ending up in a $200K a year job as a kid who has at least one parent in a $200K a year job, is living in cloud cuckoo land. As Phil noted: the US has seriously low social mobility. As Nate noted: social mobility in the US has been declining for many years, and I seriously doubt you are speaking from the point of view of someone whose childhood included going to soup kitchens between parental pay checks, living in a trailer park, and getting used clothes from Goodwill.

I have an intuitive bias to agree that at some income level they are too low. What I can't find is a fact driven proof of what "too low" means, outside of the "we (the government, that is us) need more money right now" discussion.

Marty, do you have fact driven proof of what "too high" means? If so, there's your answer. If not, then why should we trust intuition either way?

Change of subject to the labor/leisure thing: what a crock. Sorry, that's what it is. Tax people at such punitive levels that they are forced to work extra hours just to make ends meet will make the Tea Party look like pacifists.

No it's not a crock. And no one's talking about taxing plumbers and electricians at punitive levels. In fact, no one's talking about taxing anyone at punitive levels, unless you have an awfully low definition of "punitive."

People making half a million plus a year are not generally struggling to make ends meet. Those who are could probably usefully rethink their spending habits.

And it's really hard to see why you think the idea is a crock. You yourself say that the only reason you put up with all the hassle is for the money. Surely that's true of lots of others also. So, regardless of how you individually would react, isn't it reasonable to think that some people would take a tax cut as an opportunity to rid themsleves of some of that hassle without losing income, and that some would react to a tax increase by being willing to put up with more of it because they want the extra income, as indeed you do.

Sure, there would be a limit, and individuals will react differently, but that doesn't make the whole thing nonsense. There really are only 24 hours in a day.

Albanaeon, a commenter at slacktivist's, has a fascinating suggestion:

insentivising [sic] the tax rate on the wealthy by connecting their rate directly towards unemployment. Start off with a rate of say 30% and for every percentage of unemployment above say 5%, their tax rate goes up 5% ... I can't help but think that it might prevent them from routinely driving us off cliffs if there are real consequences if they do. And conservatives wouldn't have a leg to stand on since tax rates are tied to rich people's performances and it basically gives them exactly what they say they want.

Albaneon, a commenter at slacktivist's, recently wondered about:

incentivising the tax rate on the wealthy by connecting their rate directly towards unemployment. Start off with a rate of say 30% and for every percentage of unemployment above say 5%, their tax rate goes up 5% or something. I'm definitely weak on economics, but I can't help but think that it might prevent them from routinely driving us off cliffs if there are real consequences if they do. And conservatives wouldn't have a leg to stand on since tax rates are tied to rich people's performances and it basically gives them exactly what they say they want.

Sorry about the double post. Something hates me.

Actually Phil hasn't validated Jesurgislac's statement which was "The US has, compared to most European countries, incredibly low levels of social mobility."

Like almost all such questions (including a huge number of the ones where the US ends up on top) the rank ordering disguises the fact that most of the rich countries are well clustered together. And since the UK does even worse, but follows more of Jes's ideas about the proper policies we are discussing, it isn't at all clear that those policies have much to do with it.

And since the UK does even worse, but follows more of Jes's ideas about the proper policies we are discussing

I wish! True, the UK has the NHS, which is a boon to entrepreneurs and small businesses. And the NHS is so popular as to be untouchable, despite all the British conservative doomsayers looking enviously at the way US conservatives can kill people off and mouthing crap about how we can't afford it.

But for years and decades, the UK has been gripped by either Conservative or New Labour government, which has all too frequently looked at the shiny failures of the US and gone "Hey, we should do that TOO!" We used to have one of the most successful and humane programmes for drug addicts in the world - until we copied the US and drug addiction and crime-related drug addiction just soared as a direct result. The last Prime Minister who went to a state school and didn't attend Oxford or Cambridge was John Major.

One of the things I most resented about the past UK elections is that the party I was most in political agreement with, the Greens, looked likely to get one MP, not one PM.

You're free to link to data that disputes that study I linked to, Sebastian. Or that shows that the countries named in the excerpt I posted, or rich countries generally, are more alike than they are different when it comes to mobility. Or you can argue by assertion. I'm fine either way.

Also, too, just wanted to say great post, Jacob. Hope you get to do this again.

In 1993, I had one kid at an expensive private university and the other in an expensive private school. Not the way I grew up, but the plan was to do more for our kids than I had coming up. I didn't have a choice, I had to work to do for my children what seemed right at the time. I also had a boat load of other commitments. All of those are gone, as Russell correctly inferred. What necessity required of me then and what is required today are completely different. Finally, 39% is not 50%.

McK, I'm not talking about you here. Here, allow me to speak more clearly.

IN THE POPULATION AS A WHOLE, IN 1993, DID SIGNIFICANT NUMBERS OF PEOPLE REACT TO HIGHER TAX RATES BY GIVING UP WORK OR BY SIGNIFICANTLY CUTTING BACK ON THE AMOUNT OF WORK THEY DID?

If "yes", you'll need to supply some sort of evidence.
If "no", then I conclude that you're either wrong about what you'll do or at best a statistical outlier, like those people who threatened to move to Canada when Bush won.

IN THE POPULATION AS A WHOLE, IN 1993, DID SIGNIFICANT NUMBERS OF PEOPLE REACT TO HIGHER TAX RATES BY GIVING UP WORK OR BY SIGNIFICANTLY CUTTING BACK ON THE AMOUNT OF WORK THEY DID?

No, and my initial premise was for tax rates approaching 50%. I stated somewhere that I would favor going back to the Clinton rates if (a) the portion collected under the higher rates went to debt reduction and (b) we capped spending at current levels across the board.

As for upward mobility--citing to the Center for American Progress is as useful as me citing to the American Enterprise Institute--both have their agenda and both cook the stats to get where they want to go. Pre-WWII, a significant majority of Americans were rural poor to modest. With the GI Bill and near universal (for white people) access to college education, upward mobility skyrocketed. There simply were not enough "rich" in America to account for the numbers of people who, today, are homeowners with secure six figure incomes. For anyone to say that Europe, with it chronic double digit unemployment, has greater upward mobility is just crap.

The grain of truth in the CAP study is that offspring of specific demographics tend to remain or advance. But these are not affluent people who start a new business with daddy's money. Upward mobility is a visible fact in Texas, particularly among Hispanics and Asians.

A couple of final notes--I have repeatedly said that service providers will do one of two things: cut back if tax rates are too high, or adjust payroll and other benefits to expand the bottom line. Either one produces a reduction in tax revenue, one directly and the other by taking tax payers out of the system and putting them either on the streets or in lower paying jobs. The WSJ routinely refers to macro studies that show that overall taxable income declines as tax rates go up--are these valid studies, generally accepted among economists? I have no clue. I know the WSJ has its own agenda, so I discount their studies just as I do any advocacy-driven "study".

My beliefs are based on 30 years of observation and experience. I represent small business, have many friends and acquaintances who own small businesses and I have one as well. This base is representative (I don't think Texas business people think markedly different that business owners generally) and by extension, I think it is plausible if not highly likely that 50% rates will materially effect how small businesses operate. And by 50%, I mean kicking at at 250K or thereabouts.

To close--work calls and calls loudly at this point--many thanks to Jacob for a thought provoking and well presented post. Please do another soon.

Upward mobility is a visible fact in Texas,

The claim wasn't that there is no upward mobility in the US; it's that there isn't as much as many of us like to think, and less than there is in many other developed economies.

But these are not affluent people who start a new business with daddy's money.

Nor are they people who start from a background of trailer parks and soup kitchens.

"Affluence" is relative.

I never thought of my family as rich, when I was growing up: but wider social experience as an adult says that we never had to worry about new clothes, enough food, whether the bills would be paid, whether we kids would get to go on school trips, if we could afford after-school classes or sports clubs. And I, as an adult, have benefited by that background.

To put it in concrete terms you may find it easier to understand, McKinney, someone who is choosing between start-up costs and a new car is always going to be able to be more entrepreneurial than someone who is choosing between start-up costs and the next week's food. Your claim that I am "clueless" for making this distinction just says that you, like many conservatives, really have no notion what it's like to be really poor.

As for upward mobility--citing to the Center for American Progress is as useful as me citing to the American Enterprise Institute--both have their agenda and both cook the stats to get where they want to go.

I'm afraid I don't find ad hominem, false equivalence and argument by assertion to be a particularly convincing rebuttal. If you have a link to a source with contradicts the data in the report (which you certainly didn't read) or shows it to be faulty, you, like Sebastian, are welcome to provide it.

It seems to me that McK is arguing from his own experience. There may be studies etc. that demonstrate that, statistically, his experience isn't that typical, but it is (IMVVHO) kind of a fool's errand to try to convince folks that their own personal experience is other than what they have observed it to be.

For the record, I would also say that the kind of thing McKinney is talking about -- people from, if not dirt poor backgrounds, at least not particularly wealthy ones achieving a significant level of success -- is actually quite common in this country (the US).

Maybe more so in other places, maybe not. But it's not that unusual here.

Particularly in the context of people of what I take to be approximately McKinney's age (and my own), people whose parents came up in the early-to-middle of the 20th C when there were actually a hell of a lot of really, really poor people, it's an extremely common narrative.

So, just saying.

"You're free to link to data that disputes that study I linked to, Sebastian. Or that shows that the countries named in the excerpt I posted, or rich countries generally, are more alike than they are different when it comes to mobility. Or you can argue by assertion."

You already linked to the data. I was using the study you linked. It shows that the large countries are pretty close in outcomes to each other in terms of mobility (by large I mean the UK, France, Germany, and US as opposed to say Finland). The major outlier is Canada. And the best of the first four is Germany, but they don't count the multi-generational guest workers. The percentage of income 'transmitted' in the UK is 25%, in the US it is 22%, in France it is 17%, in Germany without guest workers it is 10%. It isn't until we get to Canada that we get to dramatically different numbers (4%).

But hey, don't let your own facts get in the way of snarking against me. :)

Now the really interesting thing that this does show is that nearly all of the problem 1942-1972 is found in black children in the US. If I'm reading the data properly (though they are a little bit muddled on this point) the intergenerational stickiness was twice as high. Suggesting that the mix of institutional racism and internal cultural issues (which percentages belong to which mix are highly contested and not part of the point right now) were even more damaging than we thought.

And also suggesting that for non-blacks, intergenerational transmission of income is much closer to that of Canada, than to say the UK. Which may be why, especially if you are from the US coasts, you feel like there is plenty of mobility, because in your locale there is.

And Jesurgislac, you can't blame Thatcher/Blair/Tory/New Labour. Most of the years at the beginning and the middle of this were firmly under old Labour control. And there wasn't a significant retrenchment later, so that suggests that something else is going on in the UK. (I wouldn't even begin to speculate what, I certainly don't know enough about the UK to have any idea).

There may be studies etc. that demonstrate that, statistically, his experience isn't that typical, but it is (IMVVHO) kind of a fool's errand to try to convince folks that their own personal experience is other than what they have observed it to be.

The greatest difficulty with arguing with conservatives--their inability to see beyond their own experiences.

The greatest difficulty with arguing with conservatives--their inability to see beyond their own experiences.

For the record, that isn't where I was going with the comment of mine that you're responding to.

I think most folks gut-check statements other people make against their own experience. I know that I do. It's a basic way to see if something someone is saying makes sense at a ground-truth level. IMHO, nothing wrong with that.

Everyone's experience is, of course, limited, so you have to keep your mind open. But most folks views of things -- liberal, conservative, or whatever -- are formed to some non-trivial degree by their own life story.

Can I point out, again, that many of the supports that McKinneyTexas and his parents benefited from are basically gone now? The GI Bill allowed a broad swathe of Americans from all income levels to attend college and graduate without any debt. Now, most students graduate with $20K+ in debt.

In the 50s/60s/70s, you could graduate high school, and get a good job at a union manufacturing plant, or an office job, where one worker could support a family at a relatively decent level. Now the unions and the manufacturing jobs are decimated, most office jobs require college degrees (see above) and none of the jobs offer either the security or the benefits those jobs did.

Those, and many of the other steps that created a broad middle class have been destroyed, by means testing in the name of saving money and bashing the programs as "welfare" for "undeserving" people. Companies like finance have been deregulated, and companies in general have been legally required to put short term profit ahead of their workers, the long-term good of the company, or their communities. Unions have been destroyed so the workers don't have a say in how the companies are run, or have any influence, and as a result, wages in all sectors have stagnated for average workers, while the increase in production has gone completely to stock profits and executive salaries. Defined retirement has been tossed aside for 401Ks, and other ways that have funneled people's money into the stock market, where the financial guys can skim a few percentage of commission off for themselves. Companies are routinely bought out by "investment" companies interested only in chopping them up and selling off the pieces. Government's been demonized and held hostage and used to transfer money from regular people to the same folks at the top, through tax giveaways, things like the Social Security "reform" of the 80s, etc. The generation before them learned skills in the Depression through evil socialist plots like the WPA.

McKinneyTexas's experiences aren't typical any more. The ladder that used to exist to help people move to the middle class, or beyond, has been weakened and broken in many places. The companies, communities, and society that were the engine of our prosperity have been gutted by the people who were supposed to be guiding it, to line their pockets with short-term profits, at the expense of hollowing out our economy and our country.

So yes, I am not surprised at all that social mobility is down. And that income inequality is up. And the people predicting the end of the world if we ask the guys at the top to stop gutting the country before it's destroyed are helping make sure the idyllic 50s world they romanticize can't ever return.

The greatest difficulty, in my experience, with arguing with conservatives--their inability to see beyond their own experiences.

Fixed & amusified that for you.

Welcome, Jacob! Good first post.

Can I point out, again, that many of the supports that McKinneyTexas and his parents benefited from are basically gone now?

This is a very, very good point.

Anecdota: from 1978 to 1981 I attended SUNY @ Stony Brook, a NY state university on Long Island. It was an excellent, excellent school, and I got an excellent education.

Full time tuition, up to 18 credit hours a semester, cost me $900 a year. That's about $2400 in today's dollars.

I got a Pell grant and some state money, so I basically went to school for free. I had to work for spending money.

The country wasn't dramatically richer then than it is now, we just had different priorities about where the money should go.

Labor-leisure tradeoffs? Marginal tax rates? And I missed all this? Well, that won't happen again. For your amusement, and for those who like to get deep into the weeds of economic theory, use the Google for "sandwichman + Work Less Institute of Technology".

I remain, irredeemably committed to exposing you folks to insightful crackpot economic theory,

bobbyp

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