I previously linked several editorials arguing for and against the estate tax. A frequent argument in favor of lower taxes, heard again at the recent anti-tax tea parties, is that taxing income and wealth strains the relationship between effort and reward. Higher taxes are a disincentive to working hard.
The New York Times recently published an article arguing that such arguments rely on the false assumption that that there is a clear connection between effort and financial wealth. See Before Tea, Thank Your Lucky Stars, Robert H. Frank, New York Times, 4/25/09.
Excerpts from article:
Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. * * * Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events.
* * *Another important message of recent research is that a person’s salary depends far more on where she is born than on her talent and effort. * * * Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.
* * *[W]hen government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we’re lucky enough to end up among life’s biggest winners.
Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they’d hit a triple.
Read the full article here.
It’s a provocative argument. I suspect, however, that many wealthy people who are committed to philanthropy would agree that luck and circumstances outside their control contribute to their wealth and that, as a result, they are morally obligated to society for their opportunities. However, this doesn’t necessarily lead to the belief that governmental taxing and spending is fiscally sound or that it creates the circumstances for economic and social progress. After all, individual and family philanthropy has a long history of improving society, while the modern tax on income and wealth transfers is a relatively new thing in the United States.
Thoughts, anyone?
SE
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Although I am not a proponent of high taxes, I find the “disincentive” argument specious. Realistically, how many people will make a conscious decision to work less because the government will be taking 40-50% of their earnings? If anything, high taxes may have the opposite effect; work harder to earn more money to achieve your goals because you only get to keep half of it.
1.it is a tax on money that has already been taxed once. so a rich guy in the top bracket who already paid his 39.5% would now have his estate taxed another 50% or so. which leaves us to taxing that guy on whatever he hasn’t spent during his lifetime 70% . it just seems unfair that if a guy was frugal, uncle sam gets it.
2. if there were no estate tax you’d be out of a job.
3. Gefen is probably correct. I doubt anyone will be working less just because Obama is raising taxes for the people in the top bracket
I don’t think that the argument that taxes are a disincentive to hard work relies solely on people making purely conscious decisions. The argument is that as the reward for additional effort is reduced, people are less inclined to make the effort. Put simply, would you work as hard as you work now if your salary were cut in half?
Robert Frank is arguing that because luck and circumstances, not just effort, play a big role in success, taxing those who benefit most from society is justified. Even if that were true and acknowledged, I don’t see how you can disassociate effort and reward in people’s brains. It may be that on a macro level raising taxes is on the whole beneficial. But I don’t think the argument that it stifles hard work is specious.
Saul, i don’t think people think like that. when they work they aren’t thinking about estate tax. at least not people younger than 60. they do think about income tax, but income tax is not being raised to 50%. it is being raised from 35% to 39.5%. the guy paying more is thinking about how to increase his revenue to get back that 4.5%. a guy who made $1,000,000 in 2008 and paid $350,000 in income taxes is not going to say “why should i work so hard 2009 if i’m going to have to pay $45,000 more.” (though i do believe that the hike is only on $750,000 not on the first $250,000)
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