The Myth of the Margin: Why economic attacks on progressive tax structures fail categorically.
The Margin is one of the fundamental aspects of economic analysis and theory. The theory generally goes that the value of any given thing is subjective and may fall based on circumstance and cost vs. benefit considerations. Imagine your car is out of gas in the middle of the desert. I drive by and offer to sell you a gallon of gas for 5 bucks. You’ll probably take it so that you can get to the next gas station and fuel up and you probably won’t buy a second gallon from me for that same price of 5 bucks, but what if I drop it to 4? You’ll have to think about it, and the thing that economists say you are thinking about is the marginal value of that extra value of gas. Since you already have a gallon, you don’t really value that next gallon as highly and won’t pay the same price for it. Or, even if you did pay the same price, I couldn’t continue to sell you 5 dollar gallons for very long before you realized that there was little to no marginal benefit to you from the transaction. So there’s the margin for you. Now, why are we talking about it?
Because economists like to argue that high tax rates decrease the marginal value of earning more money. Thus, if you all ready make a quarter million dollars a year you might not attempt to make any more than that if it puts you in a new tax bracket where you’d pay a larger percentage of it to the gov’t. Like if you had to pay 20% of 250,000 but 30% of 300,000. If you do the math on these numbers, you’d be left with 200K in each scenario, thus, there’d be no incentive to attempt to make the higher income. This is what conservatives blither about when they say that raising taxes will decrease productivity. They think liberals will tax so harshly as to remove all the benefits of more work.
This is obviously asinine. Let me give you two reasons. First, no one would EVER be dumb enough to implement that kind of taxation in America’s capitalist economy. Second, the conservative nightmare scenario isn’t even possible in America because the tax rate is the same for everyone on the first 8K that you make, and the same for everyone on the next 24K etc…
The way it works is that your tax bracket determines the percentage you pay on the income you make that puts you over the last tax bracket. Check it out.
So there’s never a situation in which you don’t make money even if you are going into a higher tax bracket. All that happens is that the amount you pay out of the next dollar that you earn may go up. This is where the margin comes back into our discussion. Conservatives argue that getting to keep 65% of every dollar you make after 350K may not be enough incentive for the wealthy to make even more money and we should lower their taxes in the hope that they make SO much more money that the taxes on that more than make up for the difference in the tax rate. Well, this is pretty silly. Afterall, the rich don’t make their money a dollar at a time. They make it Thousands at a time and I don’t think it at all reasonable to fear that they’re going to guffaw at the mere 2% difference between the two highest tax brackets. Out of 10,000 dollars the difference would be a mere 200 dollars, the difference between 6,700 and 6,500.
Surely it would be possible to gin up a tax system that was so punitive that the wealthy would be disinclined to earn more. If for instance you only kept 30 cents on the dollar, that might be a serious problem but this isn’t the case in America, and it never will be. They like to suggest that liberals would convince people not to make money anymore with outrageous tax policies but their predictions don’t mesh with reality. Consider the sums that the wealthy deal with; they don’t make their money a buck at a time they make it tens of thousands at a time. For them the question isn’t “should I make this dollar if I only get to keep 65 cents?” For them it’s “what could I do with another 30K?” Especially when we consider the sums that the wealthy deal with and the acquisitive nature of Americans we can see that the bogey man of the liberals destroying the economy is simply BS.
-cyranicles
