So one of my old claims that seemed to strike the commentariat as odd or perhaps even bat boy worthy was that taxes don’t really matter that much for most aggregate outcomes.
Now there have been a rash of papers by big name economists showing that taxes don’t matter on various levels. Indeed, even Alan Meltzer is pointing to studies showing how taxes don’t matter for trend inequality.
As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can’t be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%.

All of this is good, but I want to come back to what I think is an important grounding of all of this. Causal empiricism just didn’t support the notion that taxes are a big deal.
The reason is that people aren’t talking about them in a way that they would talk about something that was a big deal. Oh, they complain sure but that’s not what I mean.
So, for example if you asked someone – why didn’t you move to San Francisco or conversely, why did you move to Raleigh. Plenty of people will say, the cost of living. Indeed, it’s a meme. Everyone knows that its cheaper to live in the South and this is a reason you might consider living there when you other wise wouldn’t.
This is a strong clue that prices might be influencing folks location choices. And I mean clue. Its not definitive but it should make your ears perk up and say, “hmm is what is going on here what everyone thinks is going on.”
However, what the equivalent tax thing?
When you ask why didn’t you take that job at the bank do people say, well you know the tax bracket thing?
There is not even an easy way to describe not working because the after tax income made it not worth it. If there are no terms for it, then that’s a clue people aren’t talking about it, which in turn means that they aren’t likely doing it.
Now, maybe we could have missed something and people are talking about it but in some sort of subtle way or in a way where they are confusing causes. Sure, I think those things are real possibilities. However, then someone should be able to find those phrases or terms. To my knowledge no one has.
On the other hand.
And, this is also very important.
There are a ton of phrases and terms for not working because of the welfare state: “Put in my time”; “Hanging in there ‘til 63”; “Mooching off the system”; “Welfare queens”; “Mailbox money” etc.
This is a thing that people talk about. That is a clue that it probably exists or at least that they mean to be talking about something. What that is, we would want to check and be sure.

12 comments
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Tuesday ~ March 13th, 2012 at 1:53 pm
Ben Brennan
I’d really like to research the tax incidence of the income tax. I would imagine that because workers usually take into account after tax income after negotiating for their wages, most of the income tax burden falls on employers rather than employees. Especially for higher skillsets where there isn’t nearly as much competition for jobs. Low skilled labor may actually get hit disproportionately by income taxes because they don’t really have as much of a choice. But that said I think that’s a convincing argument for a progressive tax structure.
Tuesday ~ March 13th, 2012 at 3:10 pm
Russell Conner
Wow, hard to believe you have never been exposed to Ayn Rand even if you don’t ascribe to her values. I read Marx and another certain German to understand what was in other people’s heads.
I hear it referred to as “Going Galt”, to refuse new contracts or hold off on expanding the business to avoid crossing certain tax or regulation lines.
Avoiding ADA and upcoming Healthcare regulations are two examples.
Tuesday ~ March 13th, 2012 at 3:29 pm
Ben Brennan
People that love rand love accusing anyone that isn’t some bizarro hardline austrian libertarian of being marxists.
Also demand trumps all, not supply. If there’s a large enough resurgence in demand then any business refusing to hire the appropriate level of staff to meet it is going to sink.
Thursday ~ March 15th, 2012 at 8:29 am
Xerographica
If demand trumps all…then why not just advocate that taxpayers be allowed to directly allocate their taxes? http://en.wikipedia.org/wiki/Tax_choice
Tuesday ~ March 13th, 2012 at 6:12 pm
Lord
Usually they say they can’t expand because they can’t find the right talent, usually managers that will work for less than the minimum wage. Profitable companies expand or are soon displaced by those that will, but many if not most companies aren’t really profitable at all, only work for their owners. Not being profitable, they couldn’t afford to expand if they wanted. Work is subject to diminishing returns but that is because time is precious, not because no one can be found at any cost.
Tuesday ~ March 13th, 2012 at 5:21 pm
john jensen (@john_on_i10)
As I read that chart, the American rich enjoyed a break-out starting in 1980.
Wednesday ~ March 14th, 2012 at 3:28 am
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Wednesday ~ March 14th, 2012 at 12:09 pm
Zlati Petroff
I would bring one more point into the discussion: the Estate Tax.
The systematic dismemberment of the Estate Tax by the GOP (“Death Tax”!) has been one of the main culprits for the declining progressivity of the US tax system (and especially in the ratio of Top 0.01%’s taxes to median taxes) since the 1960s. It is so insane.
The arguments against the Estate Tax (the progeny of the rich deserve the money more than society at large / it forces families to sell assets they do not actually want to sell) are hogwash.
It is easy to design it so that families can pay it off in installments over many years and not to have to make big sell-offs in one breath.
And taking it back to your point: when would a rich person ever say:
“I better dump a billion dollars of stock and use the money to buy yachts in my late 80s rather than giving it to my own son, since I don’t want him to have to suffer paying taxes”.
Wednesday ~ March 14th, 2012 at 12:55 pm
Barry
Any WSJ editorial page argument has layers and layers of logic; you’re on level 2. The first level is also garbage; his chart shows ~8% share in Sweden vs ~16% in the USA.
That’s 2 to 1, in non-WSJ math.
Thursday ~ March 15th, 2012 at 1:52 pm
Ben Brennan
Can’t seem to reply to Xerographica, however the reason that taxpayers can’t choose to directly allocate their taxes is because they vote for representatives to do just that, it’s also the reason that at the local level there are generally votes on levies. Furthermore, government expenditure should be focused on areas where a.) the private sector is providing a good insufficiently or not at all; b.) governments have an obligation to also protect minority rights, it’s quite possible that tax choice could trample this mission; c.) There is a major political economy problem associated with this, as those with the highest levels of income could theoretically have a much larger sway over public policy. You basically give people votes based upon the income!
All things considered though I SORT of agree with the idea of tax choice, I think a better solution is trying to educate public servants on the process of good cost-benefit analysis. Additionally, I agree with Karl’s other post (RE: Bernanke) that elected officials shouldn’t anticipate the democratic process they should do what they think is right and let the consequences fall on them.
Thursday ~ March 15th, 2012 at 2:31 pm
Xerographica
We all make mistakes. It’s conceited for people to think that they are infallible. The more conceited that somebody is…the more eggs that they are willing to put in one basket…the greater the consequences of their mistakes.
Socialism resulted in epic fails because all the eggs were in one basket. You had a committee trying to allocate the resources of an entire country. Our current system results in substantial fails (recessions/depressions) because many of the eggs are in one basket. You have 538 congresspeople trying to allocate 150 million people’s taxes.
“It follows, then, that a less centralized society has the advantage of a greater diversification of its performance across a larger number of preceptors. This is because diversification here dilutes the impact of the ability, or the lack thereof, of each preceptor on the aggregate societal performance.” – Raaj K. Sah, Fallibility in Human Organizations and Political Systems
a.) the tax allocation decisions of 150 million taxpayers would provide an infinitely more accurate indication of the areas where the private sector is providing a good insufficiently or not at all; b.) minority rights are infinitely better protected by the taxpayers that genuinely care about the rights in question. c.) It wouldn’t just be me giving more votes to people based on income…it would be every single consumer… http://pragmatarianism.blogspot.com/2012/02/tax-choice-strategy-for-occupy-movement.html
Friday ~ March 16th, 2012 at 4:53 pm
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