4 ms·

I'd be curious to read more about that, because none of what you've written makes any sense to me right now. (Why would we want zero marginal tax on top earner

I'd be curious to read more about that, because none of what you've written makes any sense to me right now. (Why would we want zero marginal tax on top earner who already get zero marginal utility for her money in the first place ?).

zozbot234 11mo ago
The zero marginal tax only strictly applies to the very last cent the extreme top-earner is expected to earn in the tax period. The idea is that at this theoretical extreme top-end tax bracket basically no one is paying infra-marginal taxes, hence the share of the incentive effect compared to the pure revenue effect is maximized. So you'll want to ensure that this extreme top-earner is only paying in lower, infra-marginal tax brackets, which have no incentive effect on her. This cannot be done literally because of randomness and uncertainty, but the broad effect of paradoxically lowering optimal marginal rates at the top end is nonetheless real.
- littlestymaar 11mo ago
  It's only real if you assume top earners have monetary incentives to work more, which is a very bold assumption in a world where the top earners don't even earn money through their work in the first place. And again, the utility of income for an individual is logarithmic with regard to their income, which means the marginal utility is the inverse function and that never stopped the top earners to want more.
  - zozbot234 11mo ago
    Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. (Besides, optimal taxation models also say that capital income should not be taxed at all, and you should concentrate "capital" taxes on sources of pure rent instead, with the rest of the burden falling on labor income and/or consumption! The intuition is that taxing invested capital is basically double taxation, since the apparent "returns" on capital are in fact wholly accounted for by time value and risk. There are important offsetting arguments, but these also become less relevant at the extreme top end of the scale.)
    - littlestymaar 11mo ago
      > Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. If the CEO has a significant voting power in his company, then it's capital income even if the said income is “a salary”. Like it or not. > Besides, optimal taxation models also say that capital income should not be taxed at all It would be nice if people advocating for their political view could stop labeling their view as “optimal”, but hey, this is economics so here we are.
      - zozbot234 11mo ago
        The optimality results are drawn from modeling assumptions that happen to be fairly general, not from any specific political views. For instance, much of the real-world political advocacy of UBI or cash transfers towards low-income folks is downstream from arguments about the predicted efficacy of this as a kind of redistribution; the arguments are not themselves politically motivated. The argument for taxing pure rents only, as opposed to productive capital, is structurally quite similar; as is the general argument for paying careful attention to incentive effects at the top end of the income distribution.
        littlestymaar 11mo ago
        > The optimality results are drawn from modeling assumptions that happen to be fairly general, not from any specific political views The idea that someone rich would “work less and thus produce less value to the society if their marginal tax rate was non-zero” isn't “fairly general” it's straight Randian and it's not how the world works. Same for the idea that individual income reflect the value they create to society. The idea that you ought not to tax capital is also politically motivated. Anything can be said to be “optimal” if you pick the hypothesis accordingly, and that's exactly what's being done here… It may work on paper for a world populated by a spherical John Galt in vacuum, but it tells you nothing about the real world.

zozbot234 11mo ago

The zero marginal tax only strictly applies to the very last cent the extreme top-earner is expected to earn in the tax period. The idea is that at this theoretical extreme top-end tax bracket basically no one is paying infra-marginal taxes, hence the share of the incentive effect compared to the pure revenue effect is maximized. So you'll want to ensure that this extreme top-earner is only paying in lower, infra-marginal tax brackets, which have no incentive effect on her. This cannot be done literally because of randomness and uncertainty, but the broad effect of paradoxically lowering optimal marginal rates at the top end is nonetheless real.

littlestymaar 11mo ago
It's only real if you assume top earners have monetary incentives to work more, which is a very bold assumption in a world where the top earners don't even earn money through their work in the first place. And again, the utility of income for an individual is logarithmic with regard to their income, which means the marginal utility is the inverse function and that never stopped the top earners to want more.
- zozbot234 11mo ago
  Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. (Besides, optimal taxation models also say that capital income should not be taxed at all, and you should concentrate "capital" taxes on sources of pure rent instead, with the rest of the burden falling on labor income and/or consumption! The intuition is that taxing invested capital is basically double taxation, since the apparent "returns" on capital are in fact wholly accounted for by time value and risk. There are important offsetting arguments, but these also become less relevant at the extreme top end of the scale.)
  - littlestymaar 11mo ago
    > Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. If the CEO has a significant voting power in his company, then it's capital income even if the said income is “a salary”. Like it or not. > Besides, optimal taxation models also say that capital income should not be taxed at all It would be nice if people advocating for their political view could stop labeling their view as “optimal”, but hey, this is economics so here we are.
    - zozbot234 11mo ago
      The optimality results are drawn from modeling assumptions that happen to be fairly general, not from any specific political views. For instance, much of the real-world political advocacy of UBI or cash transfers towards low-income folks is downstream from arguments about the predicted efficacy of this as a kind of redistribution; the arguments are not themselves politically motivated. The argument for taxing pure rents only, as opposed to productive capital, is structurally quite similar; as is the general argument for paying careful attention to incentive effects at the top end of the income distribution.
      - littlestymaar 11mo ago
        > The optimality results are drawn from modeling assumptions that happen to be fairly general, not from any specific political views The idea that someone rich would “work less and thus produce less value to the society if their marginal tax rate was non-zero” isn't “fairly general” it's straight Randian and it's not how the world works. Same for the idea that individual income reflect the value they create to society. The idea that you ought not to tax capital is also politically motivated. Anything can be said to be “optimal” if you pick the hypothesis accordingly, and that's exactly what's being done here… It may work on paper for a world populated by a spherical John Galt in vacuum, but it tells you nothing about the real world.