Michael --

In which I take on a letter writer to the Wall Street Journal.

[Letter to Wall Street Journal 2 5 02]
"Taxes Follow the Money
Your Jan. 22 editorial 'A Rich Tax Debate' brings to mind Willie Sutton's
response when asked why he robbed banks: 'That's where the money is.' We tax the rich because they have the money. Using the data you presented, if we had a population of 100 people and an AGI of $100, the top guy would get
$19.50, while the bottom 50 people would divide $13.20. (Split evenly, that
comes to $.264.) I bet it's a rare person who turns down a raise [1] because
it puts him in a higher tax bracket [2]. The guy barely making a living
wage, who spends every dime just getting by, is far less able to pay income
tax [3] than the guy making big bucks, to whom paying taxes is an annoyance [4]-it just means he has less money to indulge his whims.[5]
--Robert Weston."

Assumptions made in letter:

1 Assumption: greater wealth comes in the form of a raise-that is, once
granted by some outside force, essentially permanent, and it is not a
result of greater risk taking or other activities outside the range of normal employee behavior.
2 Assumption: the desire for greater wealth is so powerful as to be indifferent to tax policy.
3 Assumption: income levels are not the result of human choices, but of higher and lower abilities.
4 Assumption: higher taxes merely annoy, but do not harm, high-earners.
5 Assumption: the desire by high-earners not to be taxed at progressive rates is the result of their childish insistence on being able to indulge their whims.

My observations about assumptions:

*Assumption #1 is very questionable. The very wealthy are not generally employees, and their wealth is generally the result of pursuing educational or risk-taking activities that fall outside of normal employee behavior. One suspects the author is not an entrepreneur or a doctor, and is unable to empathize with such people.
*Is assumption #2 true if incremental tax rates are set at 100%? (that is, if the greater income results in no greater wealth to the individual?). If not, at what incremental tax rate does this counter-incentive kick in?
*Concerning assumption #3, is it inconceivable that a person could work at less than his abilities? (Research implies that an increase in income, for example, almost always implies an increase in the time that is spent working; is everyone willing to maximize the amount of time spent on work?) If so, doesn't that suggest that "under-performing" persons-who choose a more leisurely lifestyle over wealth-are getting a "free ride" on their taxes, which are set at the level of their actual, not potential, income?
*Assumptions #2 and #4 are incompatible; assumption #2 assumes that the drive for wealth is so powerful that it is unaffected by tax policy, while assumption #4 assumes that those same individuals would not feel themselves anything more than "annoyed" by the expropriation of the very wealth they have sought so diligently.
*Assumptions #2 & #5 are incompatible assumptions; assumption #2 assumes that the drive for greater wealth is so strong that it is invulnerable to tax policy, while assumption #5 characterizes it as merely the desire to indulge whims.

Well, which is it?

Cheers,

Friedrich