Today\’s Ritchie

Ritchie responds to the criticism of his assumption that a 60% rise in average tax rates will have no impact upon behaviour.

Here.

Here\’s the comment I left there:

So, what you\’re saying, in formal terms, is that moving the average tax rate up by 60% (from 34% to 55% as you describe it at one point) will have no effect upon the following equation:

C = w (T – l)

Which is an extremely brave assumption to make and one that would require, before it being accepted as true, a certain amount of empirical research. You are, in effect, stating that no one would subsitute leisure for market income with such a tax change and that everyone has a fixed desired income which they will work to fulfil.

Yet you do seem to miss the logical implication of that latter part. If it is true that we all have some fixed income that we work to fulfil (or that this top decile do) then your tax changes will increase tax revenue over and above static changes. For as post tax incomes will be lower people will work more to get to their desired post tax income.

And as you\’ve not included such a tax rise as a result of your impression of the income effect we have to conclude that you don\’t actually believe this point either.

But as to the major point. Don\’t you think it might be a good idea to base our estimates of the revenue to be had from tax changes on the empirical research of the past couple of centuries rather than the societal impressions of a retired accountant?

7 comments on “Today\’s Ritchie

  1. Ritchie clearly has no idea that smart people don’t need much money to have fun in life.

    And a lot of top earners are child-free contractors (at least the ones I know) and they find it quite easy to work 4-6 month of the year and relax the other 6-8 especially once they grow out of the ‘wanting to own ponies/fancy cars/silly gadgets’ phase in life and get interested in spending time with people, excellent food or very good books instead.

    All this can be had quite cheaply, even being on the dole is no problem if you know how to live well. It’s only getting expensive if you want the extra 10% in life, but if 90% is good enough for you… you’re free.

    Such people are not held to ransom by a fear of no pension (after all, there will be none anyway the way things are going…), and they are smart enough to know they can just rent a house instead of saddle themselves with a huge mortgage — and he himself is pointing out that most of his prey lives in the here and now without saving for the future and only ‘greed’ is motivating them.

    Ritchie wants to be very careful about poisoning his pretty carrot…

    (besides, filling out a form to make them pay you is far more fun than paying to fill one in… 😉

  2. tricky subject this …. if you google “tax labor supply” and look for the empirical papers and ignore the theory, the evidence is mixed – lots of papers find little response in hours worked. There is some credence to the argument that people do work towards an income level, and that “well, if I’m earning less, I’d better work more” might cancel with “well, if I’m earning less, I can’t be bothered with it” to leave labour supply unchanged.

    But the relevant margin might not be hours worked, it might be the participation decision, so empirical studies looking at hours worked might be missing the story. Also, there’s a difference between short-run and long-run responses – if you read Prescott (who is a bit of a nutter) he contrasts the US with France, Germany to argue that taxes have long-run effects.

  3. Put it this way, I’m a single man, no kids, self employed business. I make pushing 6 figures at the moment. I live on a half of what I earn and save the rest. If the State is going to take well over 50% of my marginal income, there is no way on Gods Earth that I’m going to bust a gut to make the same amount of money. I’ll reduce my hours, reduce my efforts. I am not going to be a slave to the State, as that is what tax at those rates means.

    Richard Murphy can kiss my ar5e. He’s not getting any more tax out of me.

  4. I was really angry when I read the Compass stuff and yesterdays Ritichie. Thankfully today
    I have been more amused…..he expresses frustration that the opposition won’t acccept his proposals are popular “Why would a tax proposal that makes 90% of people significantly better off be unpopular? ”

    Of course superfically getting a minority of “rich” people to bail out the bloated public sector for everyone else’s benefit sounds appealing to the man in the street-DOH of course!
    But would it actually work…..me thinks not
    Rather than arguing over the shape of the Laffer curve perhaps the email my wife sent me is clearer…

    “• Bar Stool Economics

    Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
    The first four men (the poorest) would pay nothing.
    The fifth would pay $1.
    The sixth would pay $3.
    The seventh would pay $7.
    The eighth would pay $12.
    The ninth would pay $18.
    The tenth man (the richest) would pay $59.
    So, that’s what they decided to do.

    The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”

    Drinks for the ten now cost just $80.

    The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

    And so:
    The fifth man, like the first four, now paid nothing (100% savings).
    The sixth now paid $2 instead of $3 (33%savings).
    The seventh now pay $5 instead of $7 (28%savings).
    The eighth now paid $9 instead of $12 (25% savings).
    The ninth now paid $14 instead of $18 (22% savings).
    The tenth now paid $49 instead of $59 (16% savings).

    Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
    “I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”
    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
    “That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
    “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
    The nine men surrounded the tenth and beat him up.
    The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

    And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

    For those who understand, no explanation is needed. For those who do not understand, no explanation is possible. “

  5. Tim,

    To get such a big rise (60%!) in the average tax rate, the marginal rate has to increase even more steeply. The marginal rate being much greater than the average meaning that for example a 20% pre-tax pay rise might only yield 10% net. Would this not make the substitution effect greater than the income effect as there is less opportunity to earn additional income. Surely it is the increasing steepness of the progression that is the problem in raising income taxes?

    James P

  6. hmm, if you take some hard working city type who arrvies to work at 7am and earns 1,200,000 pa and tax him down to 90,000 I expect that he will still arrive at work at 7am.

    If you really squeeze him, down to what he would earn elsewhere (say 40,000) then he will indeed change jobs and work less.

    Ritchie is a sick cunt but highly paid people probably will still do their work even for much less, so long as they get more than the rest of us.

    The rest of us will have to increase our working hours to make up the shortfall if we are taxed at 60% unless we perceive the benefit through things the govt provides us, and that is unlikely.

  7. This is anecdotal but is evidence of how high taxes change behaviour.

    When I entered the work force in New Zealand in 1977 the top rate was 60% and it came in quite quickly.

    I worked at a large engineering works as a general hand. All the Tradesmen knew exactly how many over time hours they could do before the 60% came in. It didn’t matter how urgent the job and what offers were made by management it was down tools when that point was reached. Devout union members to a man not one of them would work when the government got more out of it than they did. The order they stopped work in was a rough guide to their hourly rate – electricians first, then boilermakers, welders and fitters in turn with crane drivers and general hands last. Management were on salary so had to stay until we all left.

    A few years later I finished my deck cadetship and became a deck officer. As we were all in the top band the annual payrise was a small rise in salary and more benefits – usually more time off. It got to the stage where there was 2.7 people for every job on the ship. Like most young people I left because I couldn’t get seatime for my next certificate – always on leave. All the older men had other activities like an orchard, goat farm or some other tax dodge.

    Everyone, despite different back grounds, jobs and political views had the same opinion – stop work when the government takes more than you do.

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