Friday, December 02, 2011

Infra-marginal garbage

People, I have no real dog in the fight about taxing incomes over $1,000,000 at a higher rate. In fact, if I could keep my current marginal tax rate, I'd say hack away at those 1% cads.

But, I am incredibly tired of tax increase apologists making the elementary economic mistake of conducting infra-marginal analysis.

You know, by saying things like since the tax surcharge only applies to the income ABOVE $1,000,000, all the income BELOW $1,000,000 is not affected and so incentives for these people won't change much.

The argument about tax rates and incentives is a MARGINAL argument. We presumably want the economy to expand, so the question is how does increasing taxes on the marginal earnings of these "most fortunate Americans" affect their future behavior?

At the margin, for people already making $1,000,000 changes in the tax rate on incomes higher than $1,000,000 have a full effect on the incentives of these people. The effect on their incentives to undertake further economic activity (expand their business, work more themselves) is NOT mitigated by the fact that the tax rate has not risen on the income they are already making!!

If you make $999,999 the tax increase would not affect your current liabilities under your current business plan. That is clearly true. But it does fully affect any decisions by such a person about future actions.

If we want to sock it to these "most fortunate Americans", by all means let's do. But let's not think that the fact that it's a marginal tax rate increase means that it will have an attenuated effect on their future economic activity.

PS: another bogus argument is to refer to the proposed increase as a "modest 3.25 percent surcharge". It's a 3.25 percentage point increase. If the current top rate is 35%, then the proposal is actually a 9.3% surcharge.

Hey Treasury department: Do what you want to do. Just stop lying about what it is you are doing!






11 comments:

John Thacker said...

PS: another bogus argument is to refer to the proposed increase as a "modest 3.25 percent surcharge". It's a 3.25 percentage point increase. If the current top rate is 35%, then the proposal is actually a 9.3% surcharge.

I think that the best way to illustrate the changes in rates, if you're talking about how it affects people, is to frame it in terms of reductions of take-home pay. It's a 5% reduction in take-home pay above that margin, from 65% to 61.75%.

Of course, there are state taxes, so it's actually worse than that.

But that demonstrates that the real effect on a person of a tax rate increase from 90% to 95% is to halve what they take home, not view it as a 5.55% increase.

Pelsmin said...

Why don't they leave this "most fortunate Americans" crap out of it? We're talking about the people who have higher incomes. Is it because they work harder? Is it because they have a skill that is valued and they apply it aggressively to monetize it? The question is what, in general, distinguishes wealthy people from less wealthy people. The lefties would say it's just one thing: "Luck." Most of us would say luck plays into it, but one very quickly sees a positive correlation between high income and smarts, talent, hard work, etc.
This "opinionated economist" begs the question by describing the wealthy as the "most fortunate Americans."
He who controls the language controls the debate.

Anonymous said...

"Why don't they leave this "most fortunate Americans" crap out of it? "

Uh, because they're using language accurately to describe actual things? The value judgment you are assigning to the word "fortunate" are yours. Why are you so hypersensitive? A lefty would say it's because you're attempting to deceive the masses. Most of us would say it's because you feel a little guilty and the idea that you might not "Deserve" your good fortunate strikes a nerve. (As it does for many of us.)

"Fortunate" is an accurate description of those with a lot of money - what one might call a "fortune" -- including those with incomes over a million.

Andrew said...

Anonymous is either not a native speaker of English or is being intentionally obtuse. No reasonable anglophone would actually think that fortunate means "having a fortune."

http://www.merriam-webster.com/dictionary/fortunate

Or just for you, Anonymous, here's the kids' version!

http://www.wordcentral.com/cgi-bin/student?book=Student&va=fortunate

Anonymous said...

Pelsmin,

Everything that you name besides hard work is the result of luck: intelligence is a function of luck, as is talent. Indeed, there's no way to make over $1,000,000/year without being extremely fortunate: the average person who works extremely hard just cannot make that kind of money; keep in mind, for instance, that the average person has no college education. Thus the wording makes perfect sense: these people, whatever else they are, are extremely fortunate. You may not think that's their most salient characteristic, but that's an argument for another day.

Brian J said...

No joke, this has to be one of the oddest and most useless posts I've read in some time.

"You know, by saying things like since the tax surcharge only applies to the income ABOVE $1,000,000, all the income BELOW $1,000,000 is not affected and so incentives for these people won't change much."

Who are "these people"? The same people who have enough income to pay some portion of the new tax? Well, yes, their incentives would change (more on that below), but for everyone else? How are their incentives changing so dramatically so as to be greatly affected by a tiny portion of households nationwide?

Now, I don't think anyone at all is saying that the incentives for those affected by the new tax on incomes over $1 million wouldn't be changed. However, claiming that that their incentives are affected is usually used to make some prediction that wildly overestimates any possible turn of events and, far more importantly, is an incredibly, ludicrously vain and vapid thing to say. There's literally no value in saying this, as there's no meat on the bones of this comment: nothing added as far as how they might be affected, both over the short term and long term, nor what might be gained in any way as the incentives for other people, the majority of the people are affected. There isn't even a small attempt at finding an answer. Normally, that would be bad enough, but then you piss and moan that they aren’t stating the obvious. Well, fine: do that if you like, but don’t be surprised if nobody considers this a valid criticism.

By the way, I can’t be sure, but I would bet a considerable sum of money that the majority of those affected by this additional tax are so fabulously wealthy that they barely notice it. The sorts of people that are affected by it--a hedge fund manager, for instance--do not usually have incomes right at the spot where the marginal effect takes place. I am also tempted to argue that it wouldn’t be the worst thing in the world if some of these people--a very wealthy lawyer or, yes, a hedge fund manager--actually work less, but that’s a separate discussion.

The other amusing part of this is that you completely ignore what the Treasury post was about and what Thoma was trying to convey: that this is a tax that is only going to affect a very, very small number of individuals, whether you look at the individual or business end. Whatever legitimate reasons there are for being against this additional tax, it's highly disingenuous, if not downright dishonest, to pretend that this tax would affect a large number of people. It would be so if it were a simple tax increase taking place by itself, but when the other part of the equation is to put in place something that benefits a massively larger number of people, it's laughable.

Oh yeah, don’t assume this takes place in a vacuum, because it doesn’t. If it increases demand and improves the overall state of the economy, it would almost certainly expand the economic pie to the point where everyone would be better off.

Angus said...

Dear Brian:

I looked, and I didn't make any wild predictions. I looked, and I actually said that I'm cool with taxing those 1%ers.

I simply made a point about faulty economic analysis (by the way, your 5th paragraph provides an excellent example of the fallacy).

I will say that I am NOT ok with a rule that says as long as we help more people than we hurt, any policy action is justified.

Brian J said...

Angus:

I never said you made any wild predictions. What I said was that your lack of an attempt to give any prediction at all about what might happen--kind of difficult, but not impossible, even if the answer is vague--is similar to those who make outlandish claims about relatively small movements in tax rates. It's similar to a skinny person who has an overzealous reaction to an offer of desert: they are so worried about gaining weight that they fail to process that one desert every so often is not going to have the same effect as having it twice a day, everyday.

Routinely and without fail, we are treated to claims that any sort of tax increase at all, whether through eliminating deductions or an overall rate increase, is going to be monumentally economically damaging, despite evidence, like the tax increases of the 1990s, that this might not the case. Again, this isn't to say that they had no negative effect at all, only that the black-and-white scenarios described on your side don't come to pass.

You did say that you were okay with the tax increases, but that's kind of beside the point.

How does my fifth paragraph provide an excellent example of the fallacy? I am not denying that some effect would take place.

Also, I never said that any policy that helps more than the number of people it hurts. It's a nice bastardization of what I tried to convey, though, so congratulations.

Console said...

Oh no! Not the people making $999,999, anything but that!

Brian J said...

That should be "Also, I never said that any policy that helps more than the number of people it hurts... is a good thing."

Soccer Dad said...

the small number of 6 and 7 and 8 figure net worth people I know work like dogs.
The conclusion I draw from this empirical fact is that money is not the driver; it is a useful way to keep score for the competitive, but it is not what drives these people.
At least among college presidents, their doesn't seem to be a correlation between size and "quality" of institution, and salary.
(i realize Q is loaded)
The conclusions i draw from this are (a) at least in some fields, many of the high paid people could be replaced