redistribution is challenged on the ground that it undermines the - TopicsExpress

redistribution is challenged on the ground that it undermines the work ethic of both the rich and the poor—the reduction in the (after-tax) income of the rich, brought about by redistribution, causes them to work less but so, it is argued, does the increase in the income of the poor. Both groups, the argument goes, are incentivized to substitute leisure for work. Besides being contradictory, neither point seems powerful. It is not surprising that there is very little evidence that increasing marginal income tax rates reduces work effort. A person who responds to a fall in his (after-tax) income by working less compounds his loss of income. Leisure is unlikely to be a good substitute. High-income people who work hard tend to like both working hard and making money, and they are likely to be highly competitive, and want to keep abreast or ahead of their peers in money making. Furthermore, most high earners are employees rather than being self-employed, and few employees, even among the highly paid, have any job security. If they respond to a higher marginal tax rate by working less hard, they not only further reduce their net income and jeopardize their chances for generous bonuses and rapid advancement; they may well jeopardize their employment. Suppose a person who earns $250,000 before federal income tax pays $50,000 in tax, and now his tax bill is increased by 20 percent, to $60,000. Will he work less hard? That seems unlikely to me. I think if anything he’s likely to work harder. The more serious effect of higher marginal tax rates than the effect on the work ethic is the effect in inciting a search for loopholes, creating pressure for new loopholes as well and also shifting effort to activities that involve big tax breaks, including foreign investment. A better way to increase tax revenues than raising tax rates is tax reform that broadens the tax base by eliminating deductions and exemptions that serve no economic or other social purpose. The important thing from the standpoint of income redistribution is to increase tax revenues by one means or another.-Richard Posner