Taxes and Incentives

A common criticism of the AOC plan of a 70% marginal tax rate on individuals earning $10 million or more is that it hurts people who work hard and that therefore it is a dissentive.

There are plenty of people who work hard and make nowhere near $1 million, let alone $10 million. Prince Al-Waleed of Saudi Arabia is worth $15 billion; does he work 1,000x harder than someone who is not Pee Wee? Equating work with wealth is fallacious. As Lion discusses, that there are plenty of people who are wealthy through connections or indirect ways (or what Lion calls ‘value transference‘), not because they are working so hard. Luck plays a major role too.

Rather, AOC’s plan is wrong simply because it’s unfair, not because it necessarily discourages people from creating wealth or working hard. The wealthy already pay the most in terms of taxes. The top 1% pays more taxes than bottom 95% combined, so squeezing them for as much as 40% more on top of the 30% or so they already pay, just seems punitive and ungrateful when they already give back so much. When the left says the rich need to pay their fair share, the data shows they already are.

Also, America’s progressive income tax system hurts people who make a large windfall, versus those who accumulate wealth more slowly. Someone who makes $500k in a single year will keep less money than someone who earns $500k evenly distributed over five years.

A common argument, and one I took as gospel until recently, is that higher taxes are a disincentive, but it’s not so clear-cut. Even in Soviet Russia, people still produced things such such as art and literature despite the total lack of any financial incentive. I think it’s only a disincentive if you know beforehand how much you will make, and the tax rate exceeds that. If, hypothetically, I was starting a business and knew beforehand I would make $>10 million in profit, it would be perfectly rational for me to oppose the AOC tax plan, but because my prospects are uncertain, it not like my inability to earn the maximum possible wealth I can earn factors highly into my immediate decision making processes. Someone who founds a start-up or is working at the lower-rung does not think about “what will i do if i make over $10 million” but more like “how will I break-even, get clients, and pay the bills.” Saying you oppose something because it prevents you from realizing the full potential of something that is very unlikely to ever occur, seems like a poor reason to oppose something. I would rather oppose something that prevents me from realizing the full potential of something that is likely to occur. Imagine if someone were presented an option of either paying high taxes on income above a certain threshold but lower taxes below the threshold (such as $10 million), or the other way around. In terms of medians, the rational choice is lower taxes on less income.