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January 24, 2019



Even-handed, and very reasonable even from across the aisle. One question (a question: not a provocation...) If the goal is containing the rich from having excessive political clout, are higher taxes the best available tool? What about constitutional/institutional rules (to borrow from public choice theory: certainly not friends of high taxes, but neither friends of unchecked concentrated power). From campaign finance to lobbying, to the revolving door between corporate boards and government, to bank bailouts, to politically-oriented subsidies, to tax loopholes. I may be wrong, but I suspect the public would be more accepting of Taylor Swift's riches even at low marginal tax levels, than of Henry Potter's, no matter how heavy his tax burdens.

Tugrul Belli

Sometimes I feel you raise a point just for the sake of being a contrarian. High marginal tax rates being beneficial both for the economy and the general well being of the society is one of the few clear cut issues in economics. Surely, capitalism's defects are not easily cured. But I wonder if you have any Marxist "cure" in mind.


Chris, I think the broader problem is that the idea of a "good, normal lifetyle" has remained largely unchanged for decades, but the cost of it has risen sharply compared to average incomes.

You 'd like to own your own family home, have a couple of kids, holiday abroad once a year, run a modest car?

That's more expensive now.

And because of how income distribution skews, it's difficult to redistribute.

Those on lower incomes aren't bearing the burden of paying for public services. Taxing them more might suppress demand while raising relatively little.

Middle income earners pay the bulk of taxes but are also most sensitive to tax rises. That lifestyle they were promised becomes more unaffordable with every tax rise.

The top 20% of earners already make an outsized contribution to the Exchequer - but because there's not many of them, tax rises need to be substantial to raise anything worthwhile. A couple of percent won't cut it; you need 10%, 20% rises. And that's swinging enough to make some people relocate and plenty of others seek avoidance measures.

Public spending and redistribution efforts both require a large, well-oof middle income group to fund them. When the middle feels squeezed, the poor and the rich aren't useful alternative funding sources.

So I'm not sure the rationale for taxing the rich is really the issue. The real challenge is maintaining a middle class that's big enough and comfortable enough to fund a more equitable society.


It's interesting to consider how a high tax rate on high incomes would affect top level club football. English clubs couldn't raise wages enough to compensate players for the tax rise and many would doubtless leave to play in other European leagues. Effectively it would cap wages in the Premier League. English clubs would be less competitive in the Champions league, but could perhaps afford to slash ticket prices. But then ... would TV revenues also dive as people stopped paying for Sky Sports to effectively watch The Championship? Either way, I think football fans would be paying less to support their club though they might not be contenders for Champions League any more. Anecdotally, I've heard that some supporters of teams that have been relegated to The Championship say it's more competitive and fun to watch so maybe overall the effect of getting rid of the superstars on 250K a week would be positive for many fans.

Robin Hanson

So what exactly do you see as a good enough cure? Specifically.


Musicians most certainly do not need yachts and premium Bordeauxer. The greatest of all just had a church salary. He was not even worried about royalties (as even Paul McCartney is). After writing a cantata and having it performed he wasn't bothered if it was used as wrapping paper. Yet he basically gave us the tonal system that even Swift uses (but probably doesn't understand). Not to mention the Passion of St Matthew.

I'm talking about JS Bach of course.

If we are going to get decent music again, I'd say the first step would be to reduce superstar wealth, by about 99 per cent.


With government revenue, incentives matter. For instance, a government that’s heavily dependent on oil revenue pretty much has to pursue pro-oil-business policies. It’s that simple.

In the post-WW2 era (let’s say up to 1973), governments were far more dependent on taxes paid by the median worker. Back then, their best strategy to raise revenue was to raise the earning capacity of that median worker; typically by Keynesian policies which boosted demand for labour and raised wages. The government decides to commission the M1 Motorway, firms hire workers to build it, wages go up, workers pay more tax. That sort of thing. It resulted in a society with historically all-time low levels of inequality.

Today, governments are far more dependent on taxes paid by the richest 1%, and far less on those paid by the median worker. They therefore favour policies which help the 1% accumulate the wealth they want to tax. Rather than increasing the earning capacity of the median worker, governments try and make him spend more money with easier credit. It’s lead to a reversal in the previous flattening of inequality.


“It is true that the rich have excessive political influence and that high taxes on them would reduce their ability to buy politicians.”

I think that’s EXACTLY wrong. Imagine if the US government decided to fund itself entirely through super high taxes on FANG (Facebook, Apple, Amazon, Netflix and Google). Suddenly Zuckerberg, Bezos and co are directly paying the salaries of every Senator and Congressman.

Jack Ma wants to bring Ali Baba into the US market to compete with Amazon (and therefore reduce Amazon’s profits). What are the chances Congress will allow it? Zero. Some riled American consumers want to bring an antitrust case against Google. What are the chances Congress will support them? Again, zero.

Many analysts have argued that both the UK and US economies have taken financialisation too far, and they need to rebalance. The biggest obstacle to change in both countries is that both the City and Wall Street pay a lot of taxes, and governments need the money.


If we’re trying to understand inequality, here’s another important consideration.

Gini statistics are given in two forms: before taxes and transfers (pre-T&T) and after taxes and transfers (post-T&T). Pretty much every Westernised government manages to get its post-T&T figure below 0.4, and some do much better. But here’s the interesting question. Why do some countries already start really low on their pre-T&T figure (e.g. South Korea, Iceland) while others don’t (e.g. France, the USA)?

From the figures it looks as if South Korea and Iceland would still wind up more equal than France, even if they went full Ayn Rand libertarian and abolished their governments altogether. This suggests that the level of economic inequality in a society has some highly significant non-economic causes; maybe cultural, related to the level of Asabiyyah.


Times sure have changed when this post is acompanied by a picture of Mr Potter rather than of Taylor Swift.


@Robin Hanson. I like how you add "specifically" after your question.


"She might leave the US for a tax haven thus depriving the IRS of revenue"

So, in other words taxation is voluntary. Like condos and phone contacts. Could even have 'exit clauses.'


'She might leave the US for a tax haven thus depriving the IRS of revenue'

Read MMT too.

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