A reader writes:
Felix Salmon’s counter intuitive thought regarding progressive tax rates is an interesting theory, but does nor correlate with the facts. In 1963, the top marginal tax rate in the US was 93%. Since then, it has been almost steadily lowered, till today where it stands at 35% (there was a brief period in the late 80s when it went down to 28%. Yet in this time frame, income inequality has consistently grown:
“In 2005, the top 1 percent claimed 22 percent of the national income, while the top 10 percent took half of the total income, the largest share since 1928.”
“The highest incomes come from executive pay at top corporations. In 2007, the ratio of CEO pay to the average paycheck was 344 to 1, lower than the record 525 to 1 ratio set in 2001, but substantial. …. In the '60s, '70s and '80s, the average ratio fluctuated between 30 and 40 to 1”
So, it would appear that Salmon’s argument is exactly wrong. Lower marginal tax rates over the past 40 years have produced more income inequality.
Another reader adds:
I was struck by a thought while reading that post namely that it would appear that Salmon is operating under the assumption that the government is in and of itself a corporation-like entity, and, as a result, behaves as such.
To clarify, it is assumed that corporations act in their own interest to maximize profits, but the mechanism of this action isn’t a function of the corporation as a discrete entity, but rather of the individuals (shareholders, board members, etc.) responsible for making those decisions. Because those individuals seek to increase their own personal wealth, and that of their company, they set corporate policies that increase net profits.
Government does not operate in this manner. The goal of government (and those to govern) is not to achieve maximal profits, but rather to serve and protect its citizenry. Yes, there is a great deal of pressure leading legislators to enrich donors or particular industries, and beyond that, increased tax revenue can enable more expansive (and expensive) projects, but government is not a for-profit entity and faces different incentives. This is in part because the individuals setting tax policy do not have the same kinds of incentives as those setting corporate policy in that they do not see their individual wealth affected by increased tax revenue indeed, many legislators are incentivized against progressive taxation as such policies can make wealthy individuals less inclined to donate to politicians.
Yes, if you have a progressive system of taxation, it creates incentives for government to increase the wealth of those most highly taxed and thus inequality. But government, not being an autonomous, sentient entity, has no way to work towards those incentives unless those in congress share them, and I’m not convinced that they do.