The Case For Soaking The Rich

Yglesias makes it:

Very high taxation of labor income would mean fewer huge compensation packages, not more revenue. Precisely as Laffer pointed out decades ago, imposing a 90 percent tax rate on something is not really a way to tax it at all — it’s a way to make sure it doesn’t happen. If you believe systematically lower CEO compensation packages would mean a mass withdrawal of talent from the business world and a collapse of American industry, then those smaller pay packages could be an economic disaster. But the more plausible theory is that systematically lower CEO compensation packages would mean systematically higher compensation spending elsewhere in the corporate structure. Either more frontline workers or better-paid ones. The new tax code would redistribute value inside the corporate structure without anyone actually paying the new sky-high taxes.

But Zachary Karabell doubts that taxing the bejesus out of CEOs will solve our problems:

The top 100 CEOs in the [NYT’s] survey took home a total of $1.5 billion. That’s rather nice for them, but redistributing, say, $1 billion of that would do almost nothing to help the 100 million people at the bottom of the economic pyramid in the U.S.

Even if you included upper management and got to, let’s say, $100 billion, the extra income distributed across American society would barely improve living standards. Boards could mandate that, say, Larry Ellison of Oracle should be less wealthy so that Oracle employees could be more wealthy, but Oracle employees are already on the winning side of the global economic equation. They are not the ones who need help. …

No matter what redistributive measures we took, we’d still be faced with an economic system in dramatic flux based on the erosion of traditional wage industries in the developed world over the past decades. It is not inequality that has caused the middle class to lag and suffer. Inequality rather is a symptom of a system that reached the limit of what it could provide wage earners performing jobs tied to 20th-century manufacturing.

Danny Vinik counters Karabell:

[I]f he thinks $100 billion in additional redistribution “would barely improve living standards,” he does not understand the federal budget. President Obama’s plan to expand the Earned Income Tax Credit (EITC) would cost $60 billion over 10 years and lift half a million people out of poverty while helping another 10.1 million Americans in deep poverty. You could fund that and still have $940 billion to spend on antipoverty programs over the next decade. The federal government spent $61 billion in total on the EITC last year. On the Child Tax Credit, it was $57 billion. In January, Republicans and Democrats bitterly fought over food stamp cuts that ended up totaling $9 billion over a decade. An additional $100 billion in annual federal spending would have an immense effect on the living standards of low-income Americans.

In another post, Yglesias flags a study suggesting that higher taxes on the rich could boost the economy by redirecting talent out of the financial sector:

The career choices talented people make matter not just for themselves, but for the rest of society. Jobs differ in the extent to which success helps others. Major scientific breakthroughs help a scientist advance her career but are also broadly beneficial to society. A great teacher may impact a smaller circle of people, but is still helping many people beside herself.

By contrast, lawyers and traders seem to largely compete with each other in zero-sum games. If high taxes push talented people into careers where their work helps others that could raise the growth rate and increase human welfare completely apart from revenues. The authors show that under a variety of plausible assumptions the socially optimal top marginal income tax rate is very high — in the 70 to 90 percent range — largely because high tax rates would deter talent entry into finance and encourage talent entry into research/academia and teaching.