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Tuesday, September 14, 2010

Pavlov and the Progressive Tax

The Green Party has as part of its platform the support of the progressive tax system. The logic behind it is that the progressive tax is based on need. In other words, you need all of the first $20,000 you make. You need a lot less of the last $1 million of the $5 million you make, if you're fortunate enough to make that much.

I am a big believer in the principles of Ivan Pavlov. Pavlov did experiments on mice and dogs that showed that you can influence behavior based on what you punish and reward. The progressive tax system punishes success. In fact, Ronald Reagan, when he first became an actor, got a first hand taste of its corrosive nature. When he was first an actor, many of his colleagues recommended that he only make two movies a year. That's because by making a third he'd wind up in a higher tax bracket and actually take home less.

The progressive tax system is an incentive to make less because the more you make the less of that you keep. We want to encourage everyone to maximize their income and the progressive tax system does the opposite.

7 comments:

AG said...

Are you trying to say that you could end up with less income if you were in a higher tax bracket than if you were in a lower one?

mike volpe said...

That's what happened during Reagan's time but the progressive tax system isn't that bad now.

I am saying that the more you make the less of what you make you keep and that's a disincentive to make more.

AG said...

Taxes are just one of many incentives that affect our work lives, and frankly its not a particularly strong one.

I happen to like BMWs. If I were making $250k and had the option to make another $100k but had to pay $45k of that in extra taxes, but I could then use the remaining $55k to buy my favorite car, I'd say that's a stronger incentive to work than the disincentive of entering a higher tax bracket.

What I'm trying to say, is that the only person for whom entering a higher tax bracket would be a disincentive to work is someone who basically has no idea what they'd do with that extra money. If they decide its not worth making more, so be it. We've got 9.6% unemployment, I'm sure it won't be too difficult to find someone to take their place.

Now I could see your point if the top marginal tax bracket was in the 60%-80% range, but even the most liberal of Democrats hasn't suggested anything higher than 42%, even that only for seven figure incomes. Its just not a compelling enough case.

mike volpe said...

Despite your own thoughts, not everyone is like you. The lowest marginal rate is zero and the highest will soon be almost 40% and you don't think that's a disincentive to make more money.

AG said...

I didn't say its not a disincentive to make more money. I'm saying its not a particularly strong one. I'm also saying in light of 9.6% unemployment maybe its not such a bad idea to give people who make that much money a disincentive to work more.

mike volpe said...

All I said was that the progressive tax code is a disincentive to make more money. I'm not sure how you measure whether or not it's a large or small disincentive but any policy that provides a disincentive to make more money is bad policy.

TC said...

Actually, if you have read the tax code you see that each step in tax bracket is only the money generated at that level. A simplified example of how our system works would be 20% on $0 to 1000 25% on $1001 to $2000, and 30% on $2001 and above. If you made $2001, the entire sum would NOT be taxed at 30%. Instead, the first $1000 would be at 20%, the second $1000 would be at 25%, and only $1 would be at 30%.

Additionally, as AG said, taxes are not a particularly strong disincentive to earnings. Even ignoring that the majority of the earnings at the high end are from capital gains, people earing such great income have a very high hourly wage. Mine is $225 an hour, theirs is much higher. But using mine as an example, if I normally pay 30%, then I still make $157.50 an hour. But even if the tax was increased to 42%, I would still make $130.80 an hour. I know few people that would turn up their nose at $130.80 an hour.