03
May
12

After-tax income inelasticity?

“Tax something, and you’ll get less of it.”  Well, as long as “something” is price-elastic.  Most analyses of income taxes, or at least the ones I see  in the media, assume that labour is perfectly inelastic: You can raise someone’s income taxes and they won’t work any less.

How true is that?  It clearly depends on the situation of the individual worker.  If I’m earning bare subsistence wages, and you raise my taxes, I can’t exactly work less to compensate; in fact, I’ll have to work more.  Conversely, if I’m earning a zillion bucks an hour and you raise my taxes, I can easily afford to work fewer hours (although if I’m earning a zillion bucks an hour and you raise my taxes, you probably aren’t actually raising my taxes).  But there’s more to it than that.

By way of Andrew Sullivan, who reads The American Conservative so I don’t have to we find this outstanding piece by Noah Millman:

[...] I think there’s another element at play that partly explains an anomaly in attitudes toward taxation – namely, that the most anti-tax contingent is rich, but not the richest contingent. And that is freedom – not freedom from legal constraint (the classical liberal understanding thereof), but freedom from material constraint, freedom as the ability to do what you want.

[...]

Someone earning tens of millions of dollars a year is, in a very real sense, more free from material constraints than someone who earns only a million dollars per year. Both people are rich, but the former has, as they say, more money than she knows what to do with. What this translates into is freedom: the freedom to forego income without lifestyle cost, which means the freedom to do what you like.

Someone earning only a million dollars a year probably doesn’t have that degree of freedom. But that freedom is plausibly within his reach. By working hard enough for a certain period of time, he could “sprint” to a high enough level of wealth that some measure of this freedom can be grasped.

For someone in that position, someone engaged in that sprint, high taxes may push off the prospect of reaching the goal sufficiently far that the sprint no longer looks worth it. That is to say: taxes may have a decisive effect on their ultimate status. And that is enfuriating [sic].

The most anti-tax people I know are small business owners and Wall Street traders. These people, in my experience, work very long hours. They don’t really have the choice to work shorter hours – working long hours is part of the package. Many of these people are “sprinting.” They are working so hard to get to a particular level of wealth. They may not get there – but there is a destination. And they don’t want anybody putting obstacles in their way.

(Emphasis added.)

I would add that while Wall Street traders might be able to avoid the actual incidence of higher income taxes, small business owners almost certainly cannot.

If we’re willing to sidestep Heinlein’s Razor a little, this suggests an explanation for the anger directed against anti-taxers by left-progressives.  “Wealth sprinters” undermine the shibboleth that rich people just got lucky, or cheated, or took advantage of public institutions.  They may have done all three, but they also put in a fuck-ton of honest hard work.  And if I’m a left-progressive who’s bought into the idea that wealth is an accident of birth or a result of immoral exploitation, and thus resigned myself to not being wealthy, having a wealth-sprinter come along and remind me that if I only put in enough effort I might have a shot at earning that wealth is likely to make me very resentful indeed.  (I will cheerfully admit that I don’t have the work ethic to sprint for wealth, and I don’t want to make the sacrifices involved in developing it.  This is one reason why I’m not parleying my Ph.D. into a job at Apple or Facebook or the like.)


5 Responses to “After-tax income inelasticity?”


  1. May 3, 2012 at 15:07

    A group that has very high elasticity in terms of income are wives. The higher the marginal tax rate, the more attractive being a SAHM and perhaps homeschooling your children becomes relative to working full time.

    • 2 perlhaqr
      May 4, 2012 at 06:19

      I’d probably change “wives” to “secondary income earners”.

      Mostly because my wife earns roughly 2.5 times at her job than I do at mine.

  2. May 3, 2012 at 15:21

    Good catch.

    Question: If we posit that high-earning superstars can more or less name their price, and that attempts to tax high earners really end up imposing extra costs on their employers (see also), does legislation that makes it more costly to employ women (mandatory maternity leave, required private breast-feeding rooms, etc.) affect the rate of employment of high-earning superstar women? I would guess not, which’d make them yet another regressive transfer.

  3. May 3, 2012 at 15:42

    Legislation that socializes away the disadvantages of women from a workplace perspective represents a transfer of wealth (and more importantly status) from men to women. It’s pure who…whom. Progressive/regressive doesn’t figure into it in the slightest.


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