French President Francois Hollande says he wants to tax earnings over $1.2 million at 75%. Some people worry that vertiginous tax rates will drive the rich out of France. Hamilton Nolan says he has a better idea: "Let's have a maximum annual income of, oh, $5 million, pegged to inflation."
What? A maximum income? Is this worth talking about? Sure, why not! It's August.
The first thing to point out is that a maximum income is, objectively, not a "better idea" than an offensively high marginal tax rate, because a maximum income is an offensively high marginal tax rate. It is the most offensively high marginal tax rate, of 100%, applied at $5,000,000 and one cent. If a 75% tax rate will push financiers out of Paris, a 100% tax rate will catapult them into Belarus.
Catapult 'em! you might say. After all, it's practically all CEOs and financiers up there, anyway. America's top 0.1% -- that's annual income of at least $1.7 million -- comprises 43 percent executives, managers, and supervisors at companies that aren't banks and 18 percent were financiers. The rest are lawyers (7 percent), doctors (6 percent), or in real estate (4 percent), according to Tim Noah. If you don't want those kind of people in your country, a 100% tax rate at $5 million is a good way to ensure they leave.
But wait, how would this idea even work? What would it do? We don't know what would happen if we applied a top marginal rate of 100% because something like this has never been tried in an advanced economy that I'm aware of. But for the super-rich, it certainly sends a clear message: Don't work so hard. And if you want to work hard, do it some place else.
"The obvious problem is it's an absolute cliff for people at the top, so what's the point of working here?" said Roberton Williams, of the Tax Policy Center. "Once you hit $5 million, it might actually cost you money to work because of all the phase-outs. The 100% tax is as a big a work disincentive as you can find."
The second problem would be tax sheltering. If CEOs and bankers could still persuade companies to pay them more than $5 million, they would spend much more money enriching tax attorneys to figure out where to hide the income above $5 million and one cent. "The higher the tax rate goes, the more likely you'll find people hiding it overseas," Williams said.
The third possible problem is inflation. In a healthy economy (not this one, but you know, eventually), you'd ideally like a balance of spending and investment to avoid inflation. Rich people save a lot of money because, after all, how do you spend $5 million every year? If that money were taxed at 100% and redistributed down the income ladder, the outcome would not as simple as "formerly poor people get rich, buy great apartments and condos, there are Whole Foods everywhere." Instead, prices would rise with wages. Formerly cash-needy families who are used to spending all of their earned income would get much richer, as a quintile, but as their purchasing power increased so too would prices of local goods and services who all of a sudden saw their customers getting richer year over year. At least, this is a version of one scenario macro-economists have raised when they've thought through capping incomes and redistributing the money to the less fortunate.
Finally, a 100% marginal tax rate feels targeted at the top 0.01% or so, but the effect would probably be felt beyond. Many of the people who make $5 million one year don't make $5 million the next year. The top 0.01% is really frothy.
So when you set a 100% marginal tax rate at $5 million, you're not just scaring the top 0.01%. You're scaring people who might one year kiss the $5 million ceiling -- say, a millionaire doctor investing in risky assets that might pay off. That's one reason why incentives matter. You might say "nobody making $200,000 is going to be afraid of a 100% marginal tax rate at 25X their salary" but what if that guy's a 22-year old software designer for a NYC bank who doesn't know if he wants to start a company or become CFO of Morgan Stanley? Why wouldn't that guy start his career in Canada or England to give himself the choice?
This has gone on for quite a while, and I guess I've been trolled into an over-thought response by the crazy idea that we should have maximum income, as opposed to just, you know, slightly raising taxes to pay for the stuff we've promised ourselves. Did I mention it's August?