This will warm the cockles of Doove's heart

[pjorourke]

Originally Posted by Doove

You're right, it is the point. To say that 120 million people, in aggregate, received a greater benefit than 1 million people

Well when the 1 million are paying about 40% of the total income taxes, thats the way the math works.

[Doove]

Originally Posted by pjorourke

Well when the 1 million are paying about 40% of the total income taxes, thats the way the math works.

Fine, just don't try to argue that some slug making 35 grand a year got a bigger benefit than someone making 350 grand a year. Or 3.5 mil.

[Texas Contrarian]

Originally Posted by Doove

Fine, just don't try to argue that some slug making 35 grand a year got a bigger benefit than someone making 350 grand a year. Or 3.5 mil.

With rate reductions, earned income tax credits, and all sorts of other things, someone making $35K probably isn't paying much (if any) federal income tax. Remember the report last year indicating that about 47% of U.S. households pay no net federal income tax at all?

Someone making $350K isn't even quite in the top tax bracket, and that's pretty much always been the case if you adjust for inflation.

Most people making $3.5 million or more have a considerable range of options regarding when (and even more importantly, how) to realize income. That's the main reason tax increases on the wealthy never raise anywhere near the revenue their proponents claim.

[pjorourke]

Originally Posted by Doove

Fine, just don't try to argue that some slug making 35 grand a year got a bigger benefit than someone making 350 grand a year. Or 3.5 mil.

But by the same token, a "slug making 35 grand a year", that wasn't paying any income tax, shouldn't expect much of a benefit from an income tax cut should they?

[Doove]

Originally Posted by pjorourke

But by the same token, a "slug making 35 grand a year", that wasn't paying any income tax, shouldn't expect much of a benefit from an income tax cut should they?

Nice!

Ok, so using the figure of 35 grand a year wasn't the best idea i ever had.

[Marshall]

the Alternate Minimum Tax took away much of the benefits of the Bush tax cuts to high income earners......even so, it was a spur to economic activity.....[insert Supply Side Economic Theory here]

......when you alter the tax rate you also alter people's behavior, both legal and illegal.....people do what they can to lower their tax bills.......

[Doove]

Question for the group. Let's use "Steve" as an example. Steve is a salesman, and a damn good one. So good, in fact, that he can typically pull in $100,000/yr selling his wares while working only 4 days a week. He likes his 3 day weekends, so he's satisfied and settles for the $100,000/yr. But suddenly, the economy turns bad and Steve's income if he were to only work 4 days a week will drop, say, 4%/yr to $96,000. What is Steve most likely to do:

1)Nothing, continue to work 4 day weeks and settle for the $96,000

2)Cut back on his work since it's not as beneficial to him, and only work 3 or 3-1/2 days a week

or

3)Up his efforts and start working that 5th day each week in hopes of maintaining the lifestyle he's become accustomed to?

And which of the 3 options is he least likely to choose?

Serious question.

[pjorourke]

Does this have anything to do with a 39.6% rate vs. 35%?

[Doove]

Originally Posted by pjorourke

Does this have anything to do with a 39.6% rate vs. 35%?

In a micro sense, yeah, you could say that. But the question was more macro oriented.

[pjorourke]

Well the numbers in your example dont make any sense. Why would someone work 25% extra or alternatively give up a 1/3rd of their free time to recoup a 4% income loss. Given the artificial way you structured the question, the only logical answer is 1). But that's not a real world question. Its like asking me if I could open a bottle of beer on Jupiter if you gave me a really long opener.

[Doove]

Boy, you're really afraid to answer the question, aren't ya? Ok, for the sake of argument, and to make you feel better, let's assume that all the percentages and ratios and whatever else turn out equal. Change the income loss to 25%, or add 4% of work to the guy's week, whatever.

Which option would you think he is most likely to choose, and which would you suspect he is least likely to choose?

[pjorourke]

Well even if you do change the parameter of the question, you don't now what Steve will do. It depends on whether the $4K is discretionary income or he needs it to make the nut on his loan with Tony the Shylock, how he values free time versus income, etc. It might be easier to reach a conclusion versus a group of Steve's.

The one that seems least likely is working less -- your question just indicated that he had lost $4K of income, not that you had changed the marginal value of his labor.

Whats your point?

[Doove]

My point is that people's behavior will change, alright, just as Marshall said. But when you get right down to it, not necessarily in the direction that conservatives and libertarians wish to claim.

[davidsmith0123]

Framing matters. If you put out a target income level and then say your income is reduced but you still want to hit the target and you can work more hours, then the answer is determined by the question itself. (Interesting that this seems to imply a lump sum tax, a tax unrelated to income, something that I am sure you don't really advocate.)

The real queston is about the tax rate. The possible incentive effect of income tax rates is related to the rate itself, 35% versus 39% or whatever, and the impact of that rate on marginal decisions. The example given has a reduction in income but no statement that additional work is now taxed at a higher rate.

My preferred example: For every hour Steve works, he now has to pay 39% of his income to David instead of 35%. (Thanks, guys, I volunteer to be 'the government'!) Steve is considering working another hour, and while he is willing to work another hour for $100 (Steve may be a LDH provider) and send me $35, he is not willing to work another hour for $100 and send me $39.

Of course, Steve might want to go ahead and work the hour at $100 and send me $39. His choice. But in the aggregate some of the Steves in this world may decide to not work the extra hour. Would some work more, in order to meet some sort of internal income target? Perhaps. So in theory the net effect is ambiguous.

Steve might also engage in a bit of tax evasion even if he works the same number of hours. He may decide that while he is willing to send David $35 for every additional hour he works, he is just not willing to send $39, and so he starts underreporting his income. It certainly seems within the realm of possibility that a provider like Steve might make such a decision. Steve might also decide to hire a tax preparer and engage in some tax avoidance behavior, perhaps studying up on how to claim that home office exemption. In either case tax revenue does not go up by $4 per hour. Further, once you decide to avoid or evade taxes, it is not just the marginal $4 that the government stands to lose, but all tax revenue on all hours worked.

There are also issues far beyond Steve's immediate working decision, long run issues such as the incentive for investment in schooling or the incentive for risk taking on new ventures, and the role of expected taxes in how individuals choose to make these investments.

Back to Steve. Obviously if the tax rate is 0% the government is going to raise no tax revenue. If the tax rate is 100% the government is going to raise little if any tax revenue. (Maybe some of us think Steve will work and just hand over all his income to Big Brother. Doesn't create very good incentives for quality and innovation and all that...) Between 0% and 100% an increase in the tax rate first increases tax revenue and then eventually starts to decrease tax revenue. Where the turning point occurs is not clear.

There are many complications, since we don't have a single tax rate but instead a set of tax rates that kick in at different income levels, and various tax preferences in the tax code.

The tax code itself is important, and with our complicated tax code we end up devoting more resources and effort toward tax avoidance activities and innovations instead of other possibly more productive activities. In the aggregate we employ armies of CPAs and attorneys to work on issues related to the tax code, and the high income we pay these folk incentivizes more to enter these professions. A lot of smart people are spending their time trying to figure out how to avoid taxes, what is the best transfer pricing scheme, etc, because of the tax code.

[pjorourke]

Originally Posted by Doove

My point is that people's behavior will change, alright, just as Marshall said. But when you get right down to it, not necessarily in the direction that conservatives and libertarians wish to claim.

Not necessarily in the direction that your poorly drawn question implied.