Tuesday, July 28, 2009

Slandering the Supply Curve: Why Taxes on the Rich Matter

I know of no economist that believes we are on the downward sloping portion of the Laffer curve at the current rates, but Daniel Gross at Slate commits what can only be considered a willful disregard of careful thought on the subject:
Such logic makes sense to the Journal's op-ed page staffers, who inhabit an alternative universe in which people wake up in the morning and decide whether to go to work, innovate, or buy a bagel based on marginal tax rates. But if people were motivated to choose residences based solely on high state income taxes, then California and New York wouldn't have any wealthy entrepreneurs, venture capitalists, or investment bankers—and the several states that have no state income tax, which include South Dakota, Alaska, and Wyoming, would be really crowded with rich people.
The shortcomings, let me count them:
  1. Gross discusses decisions in absolutes, rather than margins. Choices are not "never work again" or based "solely on taxes." On the margin, you consider the next additional project, and on the margin taxes matter. Did you ever turn something down you that you would have taken on if it just paid more? Me too.

  2. For those nearing retirement (*cough*, baby boomers, *cough*), the decision actually can be whether or not to work or not.

  3. The most important mistake is that he conflates taxable income with all forms of compensation. If you raise the rates on taxable income, one of the consequences is you incentivize firms and employees to change the form of your compensation so that you pay less taxes.

  4. Gross acts as if there is no reason to think New York and California are different from other places. Perhaps if he read Paul Krugman's academic work, rather than just his op-eds, this would not have gotten lost on him. State income taxes are not terrible barometers of their monopoly power. Could South Dakota or Wyoming really impose high income taxes? California and New York have enough going for them that they can raise taxes and retain those residents, and even that has its limits.

  5. The rich often have second homes, and they get to claim their permanent residence for tax purposes.* If a state wants to claim them as their own, the burden of proof is on them.
*Unless you are a professional athlete, and then you are required to claim your team's home city as your tax residence, regardless of where you live. And yes, MLB teams in higher tax states pay higher signing salaries to free agents.

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