At the Margin

Yesterday, Avedon said:

Just for the record, I have never in my life met anyone who quit working because their taxes were too high, nor have I ever even heard of someone who suddenly wanted to work harder because of a tax break.

But this argument seems to prove too much. I never heard of someone who didn't buy a product because it cost $0.01 more than he wanted to pay. Still, I take it that we all agree that price is a factor in purchasing decisions. Nobody would be shocked if I told you about a scenario where I was offered $150 to write a column and turned it down because I was too busy at the moment but then reconsidered when the offer was upped to $200. But of course the value in terms of take home pay of a $200 freelance gig is very different (especially in places with a progressive state income tax) depending on what tax bracket you're in. So I don't think it's crazy to think that marginal income tax rates could have an impact on people's willingness to take these kinds of assignments.

When you extrapolate out to something like Ezra Klein's example of a high-paid CEO it really is hard to imagine the tax incentives driving effort. The difference is that the quanta of effort available to a CEO a very large. Basically, you can either do the job and work the long hours it entails or else you can quit and do something entirely different. There's very little ability to respond to small changes in marginal tax rates with small changes in behavior.

And that's how it goes with all of this -- a change needs to be big enough for there to be some alternative course of action that it makes sense to take. In practice, we debate the top income tax rate within a very narrow band so we don't see much impact. But that's not because the theory that tax changes have consequences is crazy -- it's just because the contemplated changes are small.