Mindboggled

I’ve never been a fan of Senator David Leyonjhelm, but even so, I find it hard to believe he made the mindbogglingly absurd statement attributed to him by today’s Oz. Accusing Bill Shorten of a $1.85 billion black hole in relation to his policy of keeping the levy on high-income earners,

But Liberal Democratic senator David Leyonhjelm yesterday called out the Labor costings as disingenuous. He said it was “misleading budgeting” because Labor had no way of extending the deficit levy from opposition.

Say what? On this basis, no Opposition should ever announce policy of any kind. And of course, that goes many times over for members of fringe parties that have no chance of ever forming a government. I’ll be interested to see if he claims to have been misquoted.

Regardless, Leyonjhelm is one of a stream of regrettable politicians to be drawn from the ranks of the Institute of Public Affairs (IIRC, some even worse possibilities were derailed by racist indiscretions on social media). I won’t name names, instead repeating my possibly unhelpful endorsement of Chris Berg as the only person associated with the IPA for whom I have any intellectual respect.

39 thoughts on “Mindboggled

  1. @hc

    hc, it was you who used the word tyrannical and it was you who said the proposed 49.5% MRT would deter work effort and entrepreneurship. If you think this is parody, the parody is all yours.

    If you think $180k is a modest income, you need to get out more. 97% of people make less than this. 97%! Australia is a rich country but you say at least 97% of people make at best a modest income.

  2. The “hard working rich”, now that’s a laugh as a rhetorical device. Let’s go through it.

    (1) There are some hard working rich but how much wealth can one person’s hard work justify? Certainly not billions of dollars to one person.

    (2) There are also the idle rich: rich by inheritance, luck and simple possession of shares, property etc. They have managers and brokers to look after all this for them.

    (3) Then there are the hard-working poor. It might surprise hc to realize many people work hard and remain poor. There are many, many more hard-working poor and hard-working middle income earners than there are hard working rich: by a huge absolute margin and also by a considerable percentage margin.

    This myth that only the rich are hard working is just that; a most self-justifying and pernicious myth. It’s promoted to justify the vast disparities in wealth between a few rich and the many, many hard workers in the middle and lower percentiles.

  3. The “rich” here include doctors and university professors. Most that I know are hard-working.

  4. @hc

    “The “rich” here include doctors and university professors. Most that I know are hard-working.”

    As anyone can check if they feel like it, I’m in this category. I would certainly claim to be hardworking and good at what I do, but I wouldn’t remotely describe my income as modest.

    Like most non-billionaires, I tend to balk at “rich”, which tends to be used mainly for people like Rich Lister* (always in the news for doing something wrong), but by just about any historical standard I’d have to say I am rich.

    And of course, precisely because I’m hardworking and good at my job, the suggestion that I’m going to slack off because my marginal tax rate goes up 2 percentage points makes no sense to me. The evidence I’ve seen suggests that the incentive effects might start to bite at a marginal tax rate about 70 per cent. To be on the safe side, I’d suggest a top marginal rate of 60 per cent. That’s similar to what prevailed a few decades ago, and to the EMTR of many families.

    * In case it’s not obvious, this is a joke.

  5. HC argues that top MTRs have to cut in only at high incomes. HC speaks approvingly of Mirrlees’ view (as he represents it) that tax rates should be relatively flat.

    Top MTRs are on lower and lower incomes as high rates are removed and the system flattens.

    If what matters are the actual levels of MTRs, our highest income tax rates are now too low and no contemplated tweaks will make material difference to MTRs that come only from them. There’s no plausible argument or evidence that keeping the 2% surcharge would have, or that introducing it for the last three years had, any worrying effect on behaviour.

    JQ suggests, conservatively, that marginal rates above 70% may begin to be problematic; only lower income earners have faced effective marginal rates at that sort of level any time these last thirty years, in Australia. (And those most argumentatively concerned about inducements seem happy to treat fixing those high effective rates as too hard.)

    The strange notion that combining flat(ter) tax rates with strong targeting of support to the poor would be good, because somehow high effective rates matter only to high income earners but are trivial to low income earners, would need strong evidence. It has no supporting evidence, strong or otherwise.

  6. @hc

    “Mirrlees”

    Mirrlees’ analysis has been advanced by Emmanuel Saez and Peter Diamond, who conclude that a top rate of 73% is optimal. The papers are all available online for your reading pleasure.

  7. ChrisH, Your first sentence does not make sense and I did not say that. I said one should be wary of high MRTs on higher incomes because work disincentive effects matter more there. If a person earning $1m annually cuts their work effort by 10% then social output drops by $100,000. If a person earning $20,000 annually cuts their effort by 10% then output drops by $2000. If incomes are to be transferred from rich to poor then disincentive effects on high-income earners matter a lot.

    ChrisH, I’ve read the Saez and Diamond attempt to empirically implement the Mirrlees’ arguments. There are now many such studies about the place e.g. in the Mirrlees Taxation Review. They are very, very rough in terms of offering specific insights. I prefer the original Mirrlees’ paper, because, despite its high generality, I understand the logic of his conclusions. It is exposited in my response to ChrisH.

  8. When you said that you had two concerns, and the second was ‘the relatively low income level at which maximum MRTs cut in’ (above, at #22), you were clarifying your remarks at #8 that ‘these marginal tax rates are high at only moderately high incomes’.

    I understood you to be expressly arguing that MTRs need to cut in at higher income levels. I still understand your remarks as carrying that meaning. Perhaps that meaning does not make sense: but you certainly did convey it.

    I discussed the obvious error of such a view. But I am among many who have pointed out that the actual marginal rate of tax applying to what are certainly high incomes is not high enough to suggest any meaningful disincentive effects.

    Now you suggest that disincentives on high income earners are more important because a percentage reduction in income is much more for a high income than the same reduction for a low income. But disincentive effects have to be married with the numbers in the population. There are many more low income people facing much higher effective marginal rates than the 47% or 49% which concerns you for those earning above $180,000.

    If disincentive effects follow even in a linear way from effective marginal tax rate, the loss of income to the low income people collectively is likely to much exceed the loss of income to the high income earners collectively. And most analysis of disincentive effects suggests that where they exist it is much more substantially at much more substantial effective rates.

  9. One advantage of high marginal tax rates is they take the sting out of variability in income. Think about a hard working business person whose income goes up and down according to events beyond their control. Their income has a high variance and no one likes the risk of a high variance income. But suppose they are in a 50% MRT. They lose half the gains when their income is going up but when their income goes down their after tax income only goes down by half as much.

    It sounds symmetric, but is not. The variance of their after tax income is just one quarter the variance of their before tax income. This is a real benefit. The bigger the marginal tax rate, the bigger the benefit.

  10. @ChrisH

    If you are a high flying professional you get your jollies from your work. Income is important but no surgeon or professor is going to work less hard just because a bit more gets taken out of their pay in tax. The job is its own reward.

    But if you are, say, a cleaner of toilets you work for the money and for no other reason. If you are losing half your pay if you do the extra shift you might well decide there are better things to do with your time.

  11. If a person earning $1m annually cuts their work effort by 10% then social output drops by $100,000.

    No, because if you’re exactly equating the wage a person gets with the benefit their actions accrue to the community — and you have to be, if the social benefit of ten percent of their effort exactly equals ten percent of their wage — then the wage exactly/precisely/definitionally captures all the value and there are no externalities, negative or positive. If they’re producing a million dollars of value and receiving a million dollars worth of value then the net value the rest of society receives from their work is, well… a million less a million, innit. Exactly.

    And if they cut their effort by ten percent… ten percent of nothing is still, you know, nothing.

    A worker produces value for the community, for “others”, to the — exact! — extent that their wage is less than the value they produce. The value of their production that they receive is value that they receive, and thus is value that others — “community” — definitionally cannot receive.

    [this is, for example, why my boss charges clients more for my labour than I personally receive, and so forth.]

  12. I am assuming workers are paid their marginal product so that small reductions in effort are valued at wage*reduced effort.

    If labour markets work at allshould be roughly true.

  13. I am assuming workers are paid their marginal product so that small reductions in effort are valued at wage*reduced effort.

    Same problem: if a worker gets paid their marginal product then the net social value of their marginal work is … marginal product less marginal wage… but you’ve just equated marginal wage to marginal product, so definitionally you’re left with… zero?

    It’s the same damned answer, only with the word “marginal” inserted as appropriate. If people get paid their [marginal/full] product, then the net [marginal/full] social benefit, [marginal/full] benefit less [marginal/full] wage, is zero.

    Only if a worker is paid less than their productivity is there a net social benefit to their being employed.

  14. Or: if you focus on the margins for wages and effort, you have to focus on the margins for net benefit, as well. If you look at marginal wage and overall benefit, you’re comparing apples and oranges.

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