Progressive tax rates II

I appreciate the comments to my previous post.  They all provide good reasons why progressive tax rates may not be as fair of a way to tax as it first appears.

As dave points out, it’s inefficient to pay for a mediator to administer the system because the mediator takes his cut too.  That could be the economic rent that gets wasted in setting the rates, the cost of running the IRS and all the expense taxpayers and businesses go through to file tax returns.

W.E. Heasley suggests asking why they desire a more level income distribution?  Actual results of such schemes do not have a good track record.

thebigdog suggests considering that progressive tax rates shrinks the pie for everyone, which could hurt the very people with lower income that progressive tax rate supporters are trying to help.

With further correspondence with commenter, DG Lesvic on Cafe Hayek, he pointed me to this good passage on his website (from a section titled The Forbidden Theory of Redistribution):

At the line between rich and poor, but one penny of income separates them.  So, when it is taken from the rich and given to the poor, their stations are reversed.  The rich become poor and the poor rich, which attracts manpower from the occupations of the one to those of the other.  To restore the manpower allocations it preferred, the market must bid the net wages of the formerly higher paid occupations back up and of the formerly lower paid back down.  But, anticipating increasing rates of redistribution, and compensating not just for the current but for the greater anticipated rates, the market must bid the net wages of the formerly higher paid to even higher levels and of the formerly lower paid to even lower levels than before, for differentials even greater than before.

Let’s remember the original two sentences supporting a progressive tax rate:

Someone who makes $10,000, pays 10% to the government only has $9,000 left.  Someone who makes $1 million pays 50% still has $500 thousand left — a lot more even though they pay a higher rate.

Here’s my feeble attempt at a response.

You assume that wage rates do not change with tax rates.  What if someone who makes $10,000 earns less because the market accounts for their lower tax rate while someone who makes $1 million earns more to compensate for their higher tax rate?

You don’t think that’s possible?

All else equal, would you prefer a job that pays $50,000 and a 20% tax rate ($40,000 after tax) or one that pays $60,000 with a 40% tax rate ($36,000 after-tax)?  My guess is that you would take the lower paying job with the lower tax rate because the after-tax income is greater.

And when you think of it, why would wages be different than any other good or service?  You may spend more on a car if you did not have to pay sales tax.  Tax rates matter.

While progressive tax rates appear to be a fair way to tax, please consider that may only be an illusion.

If it were an illusion, would you still favor a progressive tax rate?


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