Shaping Market Forces

Matthew Yglesias argues that the government can alter market forces with tax and regulatory policy.

The clearest example is that if we imposed a 100% tax rate on incomes over $400,000 no one would get paid over $400,000. Offering a $500,000 salary would cost the company $100,000 more than a $500,000 one, but would do nothing whatsoever to help you attract a better employee than would a $400,000 salary since the take-home pay is the same. Similarly, a 90% tax rate on incomes over $400,000 would be a strong disincentive against paying anyone more than $400,000. It’s basically the Laffer Curve insight in reverse — high levels of taxation on the top range of income is probably not going to generate much revenue, rather it will ensure that very few people obtain super-high wages.

Now in the real world, lots of people get non-salary compensation, so designing a pro-equality tax code would be more complicated than simply boosting the regular income tax way up, but the basic point still holds — “the market” does not make inequality inevitable, we can use the tax code to alter market conditions in pretty much any way we desire. Doing this in a ham-handed way, of course, would have various bad effects, so I would prefer to see only modest steps taken in this direction (and, at the same time, toward boosting wages at the bottom end through minimum wage laws) which can be followed by further modest steps if things are working out okay. Since, realistically, only modest steps — much more modest than what’s outlined in my example — are politically possible, this is all for the best.

I take it as a given that government intervention skews the market but I’m not sure the basic trends would alter. The inequalities that make some people “worth” $500,000 to the firm and others “worth” only the minimum wage would remain exactly static. If we increased the tax and regulatory pressures against high incomes, it strikes me as unlikely that the money would instead go to hire a bunch of folks at minimum wage. Or redistributed among lower wage earners since, shoot, there’s an extra $100,000 to spend. Someone would pocket the difference or, given that hiring the $500,000 employee would still be advantageous, the firm would figure some way to hire him through untaxed incentives.

Even to the extent of creating a black market, if necessary. We have all manner of regulatory incentives to prevent people from making over $0 selling heroin, for example.

FILED UNDER: Economics and Business
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. M.Murcek says:

    Nicely put. Once again, one of Mencken’s dictums is proven: “Every problem has a simple, easy to understand, wrong solution.” Social engineering via tax policy is one of those wrong solutions. Punitively taxing someone who’s labor and talents are worth >$500,000.00 a year so that there’s money to pay highschool drop-outs union scale to lean on brooms won’t improve society a whit.

  2. Jalal Abu Jarhead says:

    One positive effect of Matthew’s proposal would be the evisceration of the AMT for folks getting paid over the limit. 🙂

  3. McGehee says:

    This is true: “the market” does not make inequality inevitable

    But that doesn’t mean inequality isn’t inevitable, because it is. The market merely recognizes this fact; no thinking person would claim it creates the fact.

    What makes inequality inevitable is diversity — of the market value of a given worker’s skills, knowledge, attitude and habits.

  4. NoTaxForMe says:

    Look to England for a real-world example of what happens when confiscatory tax rates are in effect. Back in the 70’s, some companies would actually buy suits for their executives rather than pay them the money. For the company it was a deductible expense and for the executive a benefit that–had it been paid in cash–would have been confiscated by the State. Until Maggie Thatcher showed up, England’s business and industry were in a pretty sorry state…

  5. melvin toast says:

    What’s wrong with the idea that some people get paid a lot of money and some people don’t? You get paid what someone is willing to pay you. Do we apply this luxury tax to lottery winners? Or maybe we come up with a rule that if the lottery winner is a janitor he get’s to keep the money untax.

    Bottom line is there’s nothing unethical about rich people making their money legally. There will always be an income gap. But you must remember that most rich people are also responsible for employing lots of people. Otherwise they wouldn’t have an infrastructure to make that kind of money.