Battlepanda: Progressive taxation as insurance


Always trying to figure things out with the minimum of bullshit and the maximum of belligerence.

Tuesday, November 06, 2007

Progressive taxation as insurance

The mysterious knzn contemplates the incentive effects of progressive taxation on entry into risky professions, i.e. those which produce a great deal of income for a lucky few, but not so much for the vast majority.
Does progressive (labor) taxation at the high end reduce the incentive to engage in high-value activities? It seems to me that (to the extent that highly lucrative activities really are high value) it actually increases the incentive. Most of the people with the highest compensation -- movie stars, star athletes, CEOs of large corporations, successful hedge fund managers, successful entrepreneurs, etc. -- have that high compensation not just because of decisions to engage in (ostensibly) high-value activities but because of a combination of an intentional occupational choice decision and unpredictable outcome of success in that occupation. The ones who made the same occupational choices but weren't so successful -- ordinary actors, minor league athletes, middle managers of large corporations, hedge fund managers without a lot of assets under management, entrepreneurs with limited or no success, etc. -- don't get that ultra-high compensation.
In essence, knzn argues, progressive taxation acts like a form of insurance for those entering the risky profession.
If you're successful, you make gobs of money, and you have to pay a lot in taxes, but you still end up with gobs of money; if you're not so successful, you don't make so much money, but you get an insurance payment in the form of a reduced tax bill. If the government were explicitly providing an at-cost insurance policy for actors, athletes, business people, hedge fund managers, and so on, I don't think there would be much question that the policy would encourage, rather than discourage, entry into these occupations.
(For obvious reasons, such an insurance system has to be mandatory. No insurance company will ever offer "failed rock musician" insurance.)

If the tax rates were flat or regressive, so that the failed rock musician had to pay as high a rate as the successful one, there would be fewer people entering the profession. The aspiring rock musicians wouldn't quit their secure day jobs for a shot at the big time.

Of course, if you're a Dark Satanic Millian, this is a feature of flat/regressive taxation, not a bug.