Tuesday, May 31, 2011

Thought of the day

I was reading this statement (via a link from Felix Salmon):

Emergers also have a better chance of being part of the coveted 1% who control 40% of wealth in America someday.

It got me thinking again about precisely why we have low marginal tax rates on those who make above (for example) 500 thousand per year. Now, by low I mean low in comparison with other rates in the post-WWII era.

There seem to be two explanations: 1) competition for key talent and 2) incentive for performance.

The first seems unlikely. All US executives pay taxes in the same country so it just resets the baseline. Americans seem to be the best compensated class of business executives and stock traders so international competition can only matter so much.

The second is much clearer if we (following Linda McQuaig and Neil Brooks) look at sports stars. Did Babe Ruth or Lou Gehrig under-perform relative to Micheal Jordan due to low compensation? Do we really think that the overall quality of play would decline in some massive sense?

Now we might get fewer people wasting their lives trying to become a sports superstar if they paid more in marginal taxes, but is that really a shame?

Meanwhile, infrastructure, education and the rule of law all make economic activity possible. Is it not possible that these areas are under-invested in and could use some transfer of cash?

I do not know for sure, but it is worth thinking about.

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