Taxes, Wealth and Freedom
Do high tax rates discourage work and investment, and therefore economic growth? The obvious, first-order answer should be, “yes.” If you tax something, you get less of it. Tax the returns to work and investment, and you make alternatives to work and investment more attractive.
But there’s an alternative view reverses the relationship between taxes and work. In this view, people have a certain level of income they need to maintain their lifestyle. If they can achieve that level of income with less work, they will do so – work less, and consume more time in non-remunerative activities (taking care of their kids, editing Wikipedia, lying on the beach). If work becomes less remunerative, they will work harder to maintain that lifestyle.
There’s obviously some truth to both propositions. I know people who have had to take second jobs in order to maintain their incomes. That’s not very different from having to work harder because your after-tax wage has gone down. I also know people who have declined jobs that didn’t pay enough to make it “worth it” to work that hard. That’s not very different from working less because your after-tax wage has gone down. And the empirical evidence is also mixed. Moreover, taxes are not uniform across types of income or across geography; tax increases increase incentives for tax avoidance (legally sheltering taxes from income), as well as tax evasion (illegally failing to pay taxes) and relocating to a lower-tax jurisdiction. All of which implies that it is not easy to know how changes in tax rates will affect work and investment.
But I think there’s another element at play that partly explains an anomaly in attitudes toward taxation – namely, that the most anti-tax contingent is rich, but not the richest contingent. And that is freedom – not freedom from legal constraint (the classical liberal understanding thereof), but freedom from material constraint, freedom as the ability to do what you want.
It is notable that, in general, attitudes toward taxation get more negative as you move up the income scale. But when you get to the very rich, the relationship breaks down. Why should that be?
One explanation would be that the marginal utility of income is lower for the very rich – which is true; an additional dollar makes less difference to a centimillionaire than to a mere millionaire. But that additional dollar makes even more of a difference to a poor person. If the marginal utility of income were the driver, you’d expect the fiercest opposition to taxes to obtain among the poorest contingent that actually pays taxes.
Perhaps the redistributional effects of taxation explain this discrepancy. The poorest taxpayers know they are getting a good deal from taxes; they are getting more than a dollar in public services for every dollar they pay in taxes, because the rich pay more in taxes than they do. But it’s not clear that all public services are equally valuable to the wealthy and to the poor (some probably matter more to the poor, but some are arguably more valuable to the rich), and if you measure redistribution merely by dollars-in versus dollars-out, taxes are a losing proposition at much closer to average incomes.
I do suspect that redistribution is part of the answer, and I suspect as well that wealthy individuals tend to undervalue the benefit to them of living in a society with strong and effective public services. There’s also a selection effect, as few high-earning individuals work for the government, and obviously people who depend on the government for their income should have a more favorable view toward taxation in general. But another part of the answer, I suspect, has to do with this question of freedom.
Someone earning tens of millions of dollars a year is, in a very real sense, more free from material constraints than someone who earns only a million dollars per year. Both people are rich, but the former has, as they say, more money than she knows what to do with. What this translates into is freedom: the freedom to forego income without lifestyle cost, which means the freedom to do what you like.
Someone earning only a million dollars a year probably doesn’t have that degree of freedom. But that freedom is plausibly within his reach. By working hard enough for a certain period of time, he could “sprint” to a high enough level of wealth that some measure of this freedom can be grasped.
For someone in that position, someone engaged in that sprint, high taxes may push off the prospect of reaching the goal sufficiently far that the sprint no longer looks worth it. That is to say: taxes may have a decisive effect on their ultimate status. And that is enfuriating.
The most anti-tax people I know are small business owners and Wall Street traders. These people, in my experience, work very long hours. They don’t really have the choice to work shorter hours – working long hours is part of the package. Many of these people are “sprinting.” They are working so hard to get to a particular level of wealth. They may not get there – but there is a destination. And they don’t want anybody putting obstacles in their way. They have a reason for hating high taxes that is not shared by people who are already at a high level of wealth, nor by people who do not have a reasonable prospect of getting to that level of wealth.
If you raised taxes on these people, they would be angry. They couldn’t “work less” – as I say, that’s usually not an option. But they could do something else to earn a living, and give up on the dream of “sprinting” to wealth. The more sophisticated version of the anti-tax case, then, claims that these “sprinters” generate substantial positive externalities for society from their activity.