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My colleague Martin Feldstein and Marion Valliant argue that states can’t really redistribute income at all, because wage rates respond quickly to changes in th

My colleague Martin Feldstein and Marion Valliant argue that states can’t really redistribute income at all, because wage rates respond quickly to changes in the tax rate. When the tax rates on low-income earners fall, their wage rates also drop, and when tax rates on high-income earners rise, their wages rise. These wage effects rapidly undo any attempt by the state government to create a fairer society. This is assuming that "high-income earners" pass their tax increases on to those lower-income workers below them? But isn't there also a cost associated with passing that tax on? There seems to be something wrong with this idea. . ..

gaius 17y ago
Yep, inflation.
jcl 17y ago
That assumption doesn't follow, at least not directly. Sure, the extra compensation for a highly taxed high-income employee could come from paying a low-income employee less, but it could also come from charging more money for the product or cutting expenses elsewhere (maybe by firing a few other high-income employees). I think the implication is that companies will naturally equalize after-(state)-tax incomes for high earners so that they don't go to competitors in other states with less-fair taxes. (And yes, the company may not operate as efficiently after reallocating funds to compensate for state taxes. I think this reinforces the article's point about cities being "near the peaks of their revenue hills".)
dmh2000 17y ago
it has nothing to do with that, its a supply/demand effect. its because at either end, people will work for a given effective wage. if taxes on low income (or high income) fall, their effective wage goes up so employers can pay less and still keep (or at least get new) employees. and vice-versa for tax rates rising. compare wages in neighboring Nevada and California. Absolute wages for tech employees are much higher in Cali, but because Nevada has lower taxes and cost of living. the effective wages are about the same. (well, that part is based on anecdotal info)

gaius 17y ago

Yep, inflation.

jcl 17y ago

That assumption doesn't follow, at least not directly. Sure, the extra compensation for a highly taxed high-income employee could come from paying a low-income employee less, but it could also come from charging more money for the product or cutting expenses elsewhere (maybe by firing a few other high-income employees). I think the implication is that companies will naturally equalize after-(state)-tax incomes for high earners so that they don't go to competitors in other states with less-fair taxes. (And yes, the company may not operate as efficiently after reallocating funds to compensate for state taxes. I think this reinforces the article's point about cities being "near the peaks of their revenue hills".)

dmh2000 17y ago

it has nothing to do with that, its a supply/demand effect. its because at either end, people will work for a given effective wage. if taxes on low income (or high income) fall, their effective wage goes up so employers can pay less and still keep (or at least get new) employees. and vice-versa for tax rates rising. compare wages in neighboring Nevada and California. Absolute wages for tech employees are much higher in Cali, but because Nevada has lower taxes and cost of living. the effective wages are about the same. (well, that part is based on anecdotal info)