What would a maximum income accomplish?

August 8, 2012

http://www.youtube.com/watch?v=eIoygZ5L5Rg

Hamilton Nolan of Gawker, responding to French president François Hollande's new proposed 75 percent tax bracket on income over $1.23 million, does Hollande one better by embracing the proposal of Jean-Luc Mélenchon, Hollande's Communist-backed challenger in this year's presidential election, to set a maximum income. In particular, Nolan wants a maximum income of $5 million, enforceable by a 99 percent tax on income above that level. That isn't technically a maximum income - you'd need a 100 percent bracket for that - but the idea here is an old one. Early 20th century populist Huey Long included a maximum income, and a maximum net worth, in his "Share the Wealth" program, and Mark Greif of the Brooklyn literary outfit n+1 endorsed an $100,000 maximum wage. None of these are good ideas.

Now, there is plenty of evidence suggesting that marginal tax rates far above the current top rate of 35 percent would produce a lot of revenue and perhaps not even damage growth significantly. Nobel laureate Peter Diamond and tax expert Emmanuel Saez have estimated that the revenue-maximizing top rate is around 70 percent and have argued that rates between 50 and 70 percent aren't likely to slow growth. This is certainly borne out by the experience of the United States from World War II to the the Kennedy administration, in which the top rate was 91 percent, with no noticeable harm to growth. That said, that rate applied to only a very select few taxpayers and there were more deductions than today, meaning it applied to still less income. But neither it, nor the 70 percent rate that endured from the Kennedy administration to the Reagan administration, proved major barriers to growth.

But a maximum income is another thing entirely. It, as Derek Thompson explains here,  effectively removes any incentive to work for people at that limit. The consequence would be a lot of tax exiles - and not just people, parts of companies too. "Goldman Sachs might still be in New York but they'd shift a whole lot of their business to London. London's not a bad place to live," explained Michael Ettlinger, vice president for economic policy at the Center for American Progress. "It's not like you'd have to move somewhere you wouldn't want to be."

Ettlinger has pretty impeccable progressive credentials - before CAP he worked at both the Economic Policy Institute and Citizens for Tax Justice - but is utterly baffled by the idea. "What positive do you think you'd accomplish with this?" he asks, rhetorically. "You don't raise any more revenue, and you just cause people to, forget about people moving, you get into a situation where people just stop their activities at some point and stop paying attention to how they're allocating their capital at some point."

That's the real sticking point. If you have a maximum income that includes income from investments, there's very little reason for people to save money in places they think are going to get a high return. The result is that good projects that would yield a lot of dividends are underfunded, because the extra gains realized would just get grabbed by the government anyway. If good projects aren't getting funded, the consequences for growth - not just for the rich but for everybody - are pretty grave.

Again, it's worth emphasizing that the U.S. could probably survive with top tax rates much, much closer to 100 percent than we are today. But it's hard to see what purpose a maximum income serves. The rich would leave, the rest would suffer lower growth and no redistribution would take place. As Ettlinger joked as we ended our conversation, "Call me about something more serious some time."

SECTION: {section=business, subsection=null}!!!
INITIAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, moderationrequired=false, display_more=true, includefeaturenotification=true, defaultsort=reverseChronological, comments_period=14, canvas_allcomments_id=washpost.com/km4ey0dajm, includevoteofftopic=false, allow_videos=false, childrenitemsperpage=3, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, includesorts=true, includeheader=true, defaulttab=all, includeverifiedcommenters=true, includerecommend=true, maxitemstop=2, includereport=true, source=washpost.com, allow_photos=false, maxitems=7, includepause=true, display_ugc_photos=false, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!!

UGC FROM ARTICLE: !!!

FINAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, moderationrequired=false, display_more=true, includefeaturenotification=true, defaultsort=reverseChronological, comments_period=14, canvas_allcomments_id=washpost.com/km4ey0dajm, includevoteofftopic=false, allow_videos=false, childrenitemsperpage=3, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, includesorts=true, includeheader=true, defaulttab=all, includeverifiedcommenters=true, includerecommend=true, maxitemstop=2, includereport=true, source=washpost.com, allow_photos=false, maxitems=7, includepause=true, display_ugc_photos=false, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!
Comments
SECTION: {section=business, subsection=null}!!!
INITIAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, moderationrequired=false, display_more=true, includefeaturenotification=true, defaultsort=reverseChronological, comments_period=14, canvas_allcomments_id=washpost.com/km4ey0dajm, includevoteofftopic=false, allow_videos=false, childrenitemsperpage=3, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, includesorts=true, includeheader=true, defaulttab=all, includeverifiedcommenters=true, includerecommend=true, maxitemstop=2, includereport=true, source=washpost.com, allow_photos=false, maxitems=7, includepause=true, display_ugc_photos=false, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!!

UGC FROM ARTICLE: !!!

FINAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, moderationrequired=false, display_more=true, includefeaturenotification=true, defaultsort=reverseChronological, comments_period=14, canvas_allcomments_id=washpost.com/km4ey0dajm, includevoteofftopic=false, allow_videos=false, childrenitemsperpage=3, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, includesorts=true, includeheader=true, defaulttab=all, includeverifiedcommenters=true, includerecommend=true, maxitemstop=2, includereport=true, source=washpost.com, allow_photos=false, maxitems=7, includepause=true, display_ugc_photos=false, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!
Show Comments
Most Read Business
Next Story
Sarah Kliff | August 8, 2012