I have relentlessly pushed back against the idea that higher marginal tax rates would discourage people from attempting to accumulate, work in high paying industries or invest in good projects.
I think there are lots of key facts to support this but one is the ever increasing amount that the wealthy give to charity.
For example consider the Billionaire Charity Pledge. From Aug 2010 Reuters story:
Based on Forbes magazine’s estimates of the billionaires’ wealth, at least $150 billion could be given away.
Among the rich joining The Giving Pledge campaign are New York Mayor Michael Bloomberg, media moguls Barry Diller and Ted Turner, Oracle co-founder Larry Ellison, "Star Wars" movie maker George Lucas and energy tycoon T. Boone Pickens.
A total of 40 of the richest people in the United States, including Microsoft founder Gates and investor Buffett, now have taken the pledge.
Since launching the campaign in June , Buffett, Gates and his wife Melinda have spoken to about 20 percent of the wealthiest people in the United States — 70 to 80 billionaires — in a bid to persuade them to give away their fortunes.
"In most cases we had reason to believe that the people already had an interest in philanthropy," Buffett said. "It was a very soft sell but 40 have signed up."
For one months worth of work this is a pretty high take up rate on a voluntary tax additional marginal tax rate of 50%.
Of course they get to donate to the charity of their choice but think about what we have to be saying. Here are two scenarios
Scenario One: You start a company make $10 Billion after taxes and give $5 Billion to the International Red Cross leaving you with $5 Billion for whatever else you want.
Scenario Two: You start a company but because of the much higher marginal tax rates you only wind up making $6 Billion and as a result wind up only giving $1 Billion to International Red Cross leaving you with $ 5 Billion for whatever else you want.
Now, in those two scenarios building the economy required the same risks, the same sleepless nights, the same heartache and the same sacrifice. At in both scenarios you winded up $5 Billion for consumption or other purposes.
The difference is that in the first you were able to give $5 Billion to the International Red Cross while in the later you were only able to give $1 Billion.
Does it seem plausible that people would say: well then screw it, if I can’t give another $4 Billion to the Red Cross then all of this sacrifice just isn’t worth it to me?
But, that seems hard to swallow.
I picked this story because it helps us divorce the question, “do marginal tax rates on the very wealthy significantly impact incentives” from “are increases in marginal tax rates a good idea”
In this scenario taxes purely crowded out private charity. Not only that but a charity that goes to some of the hardest hit disaster victims all around the world. Its incredibly likely that by depriving disaster victims of funds, the tax increase was a net loss to humanity.
Yet, that’s totally different than from the question: do taxes significantly impact the incentives of very wealthy people? When lots of the wealthy are giving tons to charity its hard to see that they do.