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NYT: In the Real World of Work and Wages, Trickle-Down Theories Donít Hold Up [View All]

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Omaha Steve Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Apr-14-07 11:09 PM
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NYT: In the Real World of Work and Wages, Trickle-Down Theories Donít Hold Up
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http://www.nytimes.com/2007/04/12/business/12scene.html...

In the Real World of Work and Wages, Trickle-Down Theories Donít Hold Up

By ROBERT H. FRANK
Published: April 12, 2007

When asked why he robbed banks, Willie Sutton famously replied, ďBecause thatís where the money is.Ē The same logic explains the call by John Edwards, the Democratic presidential candidate, for higher taxes on top earners to underwrite his proposal for universal health coverage.

Providing universal coverage will be expensive. With the median wage, adjusted for inflation, lower now than in 1980, most middle-class families cannot afford additional taxes. In contrast, the top tenth of 1 percent of earners today make about four times as much as in 1980, while those higher up have enjoyed even larger gains. Chief executives of large American companies, for example, earn more than 10 times what they did in 1980. In short, top earners are where the money is. Universal health coverage cannot happen unless they pay higher taxes.

Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. In their familiar rhetorical flourish, they insist that a more progressive tax system would kill the geese that lay the golden eggs. On close examination, however, this claim is supported neither by economic theory nor by empirical evidence.

The surface plausibility of trickle-down theory owes much to the fact that it appears to follow from the time-honored belief that people respond to incentives. Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less, as trickle-down theorists claim. As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.

If economic theory is unkind to trickle-down proponents, the lessons of experience are downright brutal. If lower real wages induce people to work shorter hours, then the opposite should be true when real wages increase. According to trickle-down theory, then, the cumulative effect of the last centuryís sharp rise in real wages should have been a significant increase in hours worked. In fact, however, the workweek is much shorter now than in 1900.

Trickle-down theory also predicts shorter workweeks in countries with lower real after-tax pay rates. Yet here, too, the numbers tell a different story. For example, even though chief executives in Japan earn less than one-fifth what their American counterparts do and face substantially higher marginal tax rates, Japanese executives do not log shorter hours.

FULL story at link.


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