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Reply #53: Not to mention an incentive killer [View All]

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Iriemon Donating Member (28 posts) Send PM | Profile | Ignore Wed Jul-27-05 12:57 PM
Response to Reply #46
53. Not to mention an incentive killer
Edited on Wed Jul-27-05 01:04 PM by Iriemon
At a 99% (far less for that matter) rate of tax, what incentive is there for someone to create wealth? I'm not working overtime to earn extra money if I have to give 99% of it to the government.

If there is no incentive to create wealth, people won't do it. If people don't create the wealth, there is no tax revenue generated. Then the government doesn't have the money to spend to boost the economy (even assuming, as the author does, that the government is more efficient at investing capital than private persons). The whole theory falls apart.

This theory is full of many incorrect and illogical analyses. A couple:

"It is easier to conceptualize the ultimate consequences of across-the-board income tax cuts if we first assume that the supply side of the economy is "fixed." If such were the case, it would be quite obvious to us that no actual improvement in material well-being overall would be possible for a population that receives such a tax cut. That is to say, the outcome would be the same as that described in the "Everyone a Millionaire!" scenario above where we implicitly assumed that the supply side of the economy was unable to produce any additional output."

A cut in taxes is not equivalent to giving everyone a million dollars, because those with more income benefit more from a tax cut than those with less. Coversely, an increase in (progressive) taxes does not decrease the supply of wealth equally. The wealthy lose more. They lose relative purchasing power, the opposite of the argument the author makes.

"Whenever an individual household is able to increase its disposable income, its purchasing power will either increase, decrease, or not change at all depending on what has happened to the disposable incomes of all other households."

This is not necessarily or even probably correct. To be correct it assumes 1) that disposable incomes is the sole factor in establishing prices, 2) invidivual households purchasing power will also increase or decrease equally relative to the marginal change of other households, not just the overall change. That does not happen if the tax rates are made more progressive (or regressive).

For example, take the author's hypothetical comparison of Gates, Allen and Buffet. Gates earns $1 billion and Allen earns $800 million. After his taxes, Gates' DI is $18M and Allen's is $16M.

The author argues that under his progressive tax system, Gates ends of with more disposable income. Of course. But then the author states: "The comparative bidding positions of all three men within the hierarchy of national income distribution would be preserved." That is demonstrably false. As a result of the taxes, Gates' disposable income is proportionally *less* than what the others make. Gates makes 25% more than Allen, but his disposable income after the progressive tax is only 12.5% greater. This doesn't sound like much, because we are talking about the difference between a 98 and 99% tax rate. The marginal effect is greater with a greater differential. For example, if the progressive tax rate was 0% up to 800M and then 99%, Allen's DI would be 800M and Gates' would be 802M. Gates earns 25% more, but his DI is only 0.25% higher.

That is why the next statement is wrong: "With the Progressive Income Tax, taxpayers do not need to be concerned about the shrinking of their disposable incomes. They can know with certainty that prices will drop to levels they can afford if all consumers have their disposable incomes reduced in a way that preserves everyone's relative 'bidding positions.'" In fact, everyone's relative "bidding positions" are not maintained as a result of a more progressive tax rate.

This is just silliness.
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