On the subject of raising marginal rates for rich people:
Here’s why: in 2007, there were 495,000 tax returns filed for millionaires. That means a significant fraction were corporate CEOs, CFOs, finance people, and professional athletes/best-selling textbook authors/TV celebs.
Peyton Manning makes about $30 million a year — let’s explore his potential behavioral responses to changes in taxes. Let’s raise Peyton’s taxes by 10%. Under the logic of Alan Liard, Greg Mankiw’s student, and under the logic that all economists know to be the truth, people respond to incentives. Peyton Manning is a person, so he responds to this tax hike by working 6% less, and decides now he’s going to sit for the Colts playoff games since he makes less money per game, and he enjoys watching Tom Brady play in the playoffs more than being there himself. Doesn’t really sound likely, does it?
Of course, Peyton Manning is going to play 16 NFL games and the playoffs even if you raise his taxes considerably. The same is true of a wide variety of other professions — corporate execs usually have two choices, they can choose to work or not work — there are no part-time CFO jobs, and it’s probably tough to be a “part-time” hedge-fund manager as well… So, let’s say Greg the textbook publisher or Chuck the hedge-fund manager decides, due to higher taxes, that they are just going to retire. In that case, the government loses 100% of the taxes Chuck or Greg would have paid! The multiplier is -10!!!
Except, according to logic which is totally obvious to a pre-schooler, if Greg the textbook author doesn’t sell textbooks, then Thorstein the textbook publisher will. If Peyton the quarterback doesn’t play in the playoffs or appear in Gatorade commercials, then Tom the quarterback will. If the CEO of Anthem, who routinely makes $40 million, quits due to high taxes, Anthem will pay the next CEO extravagantly. If Chuck the hedgefund manager doesn’t manage Peyton’s money, then Emilio the hedgefund manager will manage Tom’s money…
(emphasis mine, and I think that the hedge fund manager managing Tom’s money would be named Ashok, not Emilio, and he work out of Bangalore, not Wall Street, or at least he would in a system that was truly efficient.)
What he does not note is that the massive amounts of money received is not because they will do the “productive” “work” for only that amount of money, but because Peyton, and Tom, feel that they deserve more than the next best guy at their position.
If you engage in policies that discourage extremely high income, for example, expanding the AMT to include all forms of income, and increasing the marginal tax rate for the AMT (Currently 26%, and which has little/no deductions), at $¼ million by 1%, and by an additional 1% at $250K increments, so that a income beyond $1 million is taxed at 29%, and at $5 million it is taxed at 45%, at $10 million it is taxed at 65%, and it maxes out at 85% at $15 million,* then you will find that business will be less inclined to ginormous packages,† and you would see a moderation in this trend.
*Note that these are marginal tax rates, so the 85% is the tax payed on the dollars earned beyond $15 million, the 50 thousandth dollar would still be taxed at around 20%.
†Yes, I know, “ginormous package” sounds dirty, but the executive pay levels are obscene.