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August 05, 2007
Tax These People
These Silicon Valley millionaires seem to me to be a perfect example of why we need more progressive taxation. It's not that they're unsympathetic characters -- they work very hard, and they seem like perfectly nice people. The trouble is that they're a case study in how the marginal utility of money diminishes, especially when there's nothing left to pursue but positional goods:
“Everyone around here looks at the people above them,” said Gary Kremen, the 43-year-old founder of Match.com, a popular online dating service. “It’s just like Wall Street, where there are all these financial guys worth $7 million wondering what’s so special about them when there are all these guys worth in the hundreds of millions of dollars."
...Silicon Valley offers an unusual twist on keeping up with the Joneses. The venture capitalist two doors down might own a Cessna Citation X private jet. The father of your 8-year-old’s best friend, who has not worked for two years, drives a bright yellow Ferrari.
Apart from one woman who fulfilled a childhood dream by having a swimming pool in her backyard, there don't seem to be many people who are using their wealth to satisfy deeply felt personal desires.
Laffer curve fans won't be happy with this article either. The people that the article describes are working 60-hour weeks and coming in on weekends despite their high tax rates. And the occasionally-mentioned people who had opted out of the Silicon Valley rat race didn't do it because they realized that high tax rates meant that their work was insufficiently remunerative. They left because they'd made enough money to ensure a high standard of living for the rest of their lives.
If the central idea behind the Laffer curve is that high tax rates decrease revenue by discouraging work, it's possible that there are cases in the article that bend the curve backwards. If part of the reason why the Gage family left for a wonderful house in Oregon with their $3 million was that they'd made enough money to live as they wanted to, we have a case that bends the curve backwards. If people are planning to make a fixed amount of money after which they can move away and live comfortably for the rest of their lives, higher tax revenues actually encourage work. They make you work a longer time to accumulate the millions you need to live comfortably. And as you work longer at higher tax rates, you pour more money into the federal coffers.
One of the things that makes the people in the article rather sympathetic is their lack of arrogance about their wealth:
“I always ask myself, ‘Do I deserve it?’ ” she said. “It never feels like you do, because that’s a lot of money.”
Ms. Baranski is hardly the only working-class millionaire asking herself this question. Ms. Holland said she regularly works with multimillionaires who wonder why they are so well compensated when others, like teachers, who contribute so much to the world, are not.
I don't want to make Celeste Baranski worse off. In fact, part of the argument for progressive taxation is that taxing away more of her money will do very little to harm her. I just know that by taxing her at higher rates and using the proceeds to help teachers -- not to mention people with infectious diseases in developing countries -- we can make the world a much better place.
August 5, 2007 | Permalink
Comments
despite their high tax rates
I'm an enthusiastic supporter of progressive taxation, but if you think these people are paying high taxes you are very much mistaken. Even if their wealth is rapidly increasing due to salary income - which I am given to understand is not usually the case in Silicon Valley - the top rate in the US must be considered very low both by world and by historical US standards.
My understanding is that most software professionals make their money on stock and stock option grants; I suspect a lot of this is taxed as capital gains. That's what, 15%? That's only twice the sales tax in California. And since it's not covered by payroll tax (15% counting employer and employee contributions, or for the self-employed, although I think it's capped at some point per year) it could almost be considered tax-free.
Posted by: Warren Terra | Aug 5, 2007 11:52:48 PM
"I don't want to make Celeste Baranski worse off. In fact, part of the argument for progressive taxation is that taxing away more of her money will do very little to harm her. I just know that by taxing her at higher rates and using the proceeds to help teachers -- not to mention people with infectious diseases in developing countries -- we can make the world a much better place."
I for one see no reason why paying teachers who perform poorly more money and sending money to sick people abroad will make the world a better place.
Posted by: Stan | Aug 5, 2007 11:53:59 PM
I completely agree with Stan. If we spend money to reward the teachers in direct proportion to how poor their performance is and furthermore send money abroad in such a way that we convince foreigners to become diseased, surely we will be compounding our problems.
Posted by: Warren Terra | Aug 6, 2007 12:08:08 AM
To Stan and Warren: higher teachers' salaries will attract more talented people to the profession.
Posted by: Steve | Aug 6, 2007 2:19:58 AM
To Steve: Was I really too subtle?
Posted by: Warren Terra | Aug 6, 2007 2:43:53 AM
I suppose that this might be a good point at which to promote John Edwards' plan to raise the top capital gains tax rate.
Posted by: Neil the Ethical Werewolf | Aug 6, 2007 3:02:51 AM
Yes, lets tax the rich and use those taxes to improve everyone's well being. Many studies show that the life expectancy of the rich goes up the when those at the bottom have their basic needs met. So, I say we reward the rich with a longer life expectancy by taxing them. This might also get Democrats a few pro-life votes if framed correctly.
Posted by: jncam | Aug 6, 2007 3:35:43 AM
There's something else involved here and it's really obvious but I think worth mentioning. The wealthy can stay wealthy in this country because every part of our economic system benefits them and penalizes those with less. Credit for is cheap for the wealthy. This encourages things like real estate speculation further driving up the prices of homes (though we'll see how well that works out in the next six months or so). Who would argue against the charitable contributions of the wealthy? Well, perhaps me. In a lot of cases foundations created by the wealthy, while doing good work, also are shelters for keeping more money in the family and social circles because these foundations seldom employ people who aren't similarly economically situated. So the children, spouses and relatives of the better off get fat foundation gigs while directing a smaller portion of the money towards the charity's goals. And while this point may be tangental to some extent, even employers are now using credit scores to determine employment. The upshot of that is obvious, the better your credit score, the better job is available and, since your credit rating is negatively impacted every time you check it (no matter how small that hit is) those will lower scores can less afford to even seek jobs that have this qualifier.
There are other arguments to be made but my point is that we've developed a wonderful system to reinforce wealth (and poverty) in this country. Progressive taxation is just part of the strategy to even things out here.
Oh and to anyone who wants to whine out that most intellectually dishonest argument about progressive taxation discouraging wealth and productivity, the response to that is simple. Try not being wealthy for awhile, that my friends is a big incentive to get out and and be productive.
Posted by: ice weasel | Aug 6, 2007 3:47:04 AM
Yes, it is criminal that capital gains and dividend tax rates are lower than earned income rates, so start there.
Imagine that you have $1-2 million in the bank. You could be looking at $500-600 thousand to educate your kids. You face the risk like everyone else of losing your employer-providing healthcare, and catastrophic illness could easily wipe out what is left. How secure should anyone with this level of assets feel in this society? There are good reasons why these people do not feel filthy rich.
Posted by: bob h | Aug 6, 2007 7:00:53 AM
Yes, but why are you spending that much money to educate your kids again? And surely if you've got that sort of dough, you can afford really good health coverage. Sure, a disaster could ruin your nest egg, but hell, the economy could collapse tomorrow and render paper money practically worthless. Even rich people can't avoid all possible risks. That doesn't change the fact that a whole slew of insecurities that beset the less well off aren't going to be on your radar at all.
Posted by: Gordon Lightfoot | Aug 6, 2007 8:22:54 AM
The amount of money some of the people in the article have accumulated isn't much more than the amount set aside (at great expense to taxpayers) for civil service pensions. Sure, the silly valley folks probably have far fewer cash flow problems than a teacher/fire fighter/social worker but, at the end of their respective careers the money civil servents get in pensions is probably equal to interest on $1.5MM. The benefits, especially health care, is something most well off workers in the private sector can only dream of. No surprise the people in the article are insecure. Of course if you work for Walmart no need to worry; you're doomed.
Posted by: Gearhead | Aug 6, 2007 8:48:44 AM
"Many studies show that the life expectancy of the rich goes up the when those at the bottom have their basic needs met. "
Really, jncam? Do you have some cites? I'm intrigued as to why that would be so.
Posted by: emjaybee | Aug 6, 2007 8:50:22 AM
"I just know that by taxing her at higher rates and using the proceeds to help teachers -- not to mention people with infectious diseases in developing countries -- we can make the world a much better place."
What rate? These things have impacts elsewhere, so it's really about how much higher you want to go.
And puppy dogs... those make the world a better place too.
Posted by: hmmmm | Aug 6, 2007 9:21:32 AM
"The wealthy can stay wealthy in this country because every part of our economic system benefits them and penalizes those with less. "
ice, how exactly does it penalize those with less? I agree with that the system benefits the wealthy, but what system doesn't? They're wealthy. I imagine the wealthy have it pretty good in France's system too.
Posted by: hmmmm | Aug 6, 2007 9:26:54 AM
Neil we don't need your Edwards whoring.
Posted by: Phil | Aug 6, 2007 10:08:36 AM
Neil we don't need your Edwards whoring.
Nominated for dumbest comment on the thread thus far.
Posted by: WB Reeves | Aug 6, 2007 10:23:05 AM
Sure, the silly valley folks probably have far fewer cash flow problems than a teacher/fire fighter/social worker but, at the end of their respective careers the money civil servents get in pensions is probably equal to interest on $1.5MM.
Let's see--$1.5 million, invested at 6% per annum, yields $90,000 a year. Yeah, that's exactly the ordinary pension for a teacher/firefighter/social worker.
Posted by: rea | Aug 6, 2007 10:28:58 AM
Gearhead,
Thats a good point about civil servant pensions. In fact, we'd be better off if Uncle Sam provided (or required) civil service benefits to every worker (defined benefits pensions, health coverage, work hours and vacation schedule).
Posted by: beowulf | Aug 6, 2007 10:31:26 AM
Jeez, Phil, looks like somebody has a case of the Mondays.
This Laffer curve stuff is so absurd. As long as there is any financial incentive, people are going to work. As long as there is any level of incentive to put in more hours, people are are going to put in more hours. If a $1 million salary puts more money in a person's pocket than a $900,000 salary, then people are going to go after that $1 million salary, no matter how much higher they will be taxed for it.
And this is, of course, besides all the other incentives for working hard: promotions, patents, status, the challenge of solving tough problems, boredom outside work, etc.
I just know that by taxing her at higher rates and using the proceeds to help teachers -- not to mention people with infectious diseases in developing countries -- we can make the world a much better place.
This is true. However, there's more to progressive taxation that this. The wealthy in this country - in any country - benefit greatly from publicly-funded infrastructure, research, subsidies - both in the past and ongoing. Their reward for being able and willing to creatively take advantage of all these public benefits is financial gain. At the same time, it's hardly unreasonable for the public to expect a return on its own investment.
That's the case for progressive taxation.
Posted by: Stephen | Aug 6, 2007 10:44:45 AM
For Stephen and Neil:
http://cafehayek.typepad.com/hayek/2004/10/prescott_on_tax.html
Seems like taxes do impact work.
Posted by: hmmmm | Aug 6, 2007 10:57:14 AM
hmmmm,
Oh please. First we're told that Prescott has found the reason why Europeans don't work as much as Americans: TAXES!
Then we're told that actually, Europeans do work as many hours as Americans, they just have this massive underground economy. I'd be a little more inclined to believe Prescott's conclusions if he could settle on what his basic premise is.
Again, this stuff ignores basic human psychology. Duncan has a post up that addresses this issue, at least tangentially. Some economists have a Grand Unifying Theory which explains all data and takes no notice of the human factor. Others understand that human beings don't live according to academic theories.
No matter the tax rate, if a human being has a chance to make more money, that person will do so in almost every case. No one, when looking at a raise in their salary, is going to pore over the IRS's tax tables as part of their decision-making process. No one looks at the level above them in the hierarchy, realizes that its pay grade comes with a tax rate that's just too darn high and slacks off just enough to stay out of the running for promotions while working hard enough to ensure their own continued employment at their position.
Seriously, that's what is being suggested here. Even the recent stuff from CEO types where one claimed that if his taxes went up he wouldn't work as hard is nonsense. If every major company's CEO salary dropped to $1 million a year, they wouldn't slack off. They wouldn't be able to, because the boards of directors would just find someone else. If $1 million is the most anyone can make, there will still be a bunch of people waiting in the wings for their chance to make that $1 million.
Increasing the rate at which the wealthy are taxed will not change the fact that people want to make more money. So what if they can't make it as quickly as before? They still have that goal in front of them, and will still put in the hours needed or whatever to reach that goal.
Economics is a surprisingly insular discipline with the expectation that every behavior can be explained by some theorem or another. Given that, it's not surprising that Prescott thinks he can explain away centuries of history and the complexities found in multiple cultures with some pop-economic gibberish.
However - and it can't be emphasized enough - psychology is far more important and far more powerful than any theory that Prescott or anyone else can employ in their attempt to make the world fit their presuppositions.
Posted by: Stephen | Aug 6, 2007 11:30:43 AM
Hear, hear Stephen. There has been a steady degeneration towards a vulgar economic determinism on the Right. They start with an apriori model of "human nature" based on ideological assumptions and never look back.
Posted by: WB Reeves | Aug 6, 2007 11:39:24 AM
We cannot complain anyone for their higher income until they get it from right ways. Silicon valley people working hard, and utilizing their knowledge to make dollars.
life insurance derbyshire
Posted by: Peter | Aug 6, 2007 11:49:56 AM
Those actuarial retirement assets are hardly equivalent to personal financial asset. While assets are set aside for retired public employees, the idea is those asset and derived income will be draw down to pay for their pension and other benefits. And if actuaries does their job right, draw them down to exactly zero at the time of their death. Maybe not in an person by person level, but in aggregate, that's the goal.
Now in aggregate, does anybody really expect those poor Silicon Valley millionaires will outlive their savings and leave no estate to their heirs, make inequality worse into future generations?
Too put it another way, there are financial products out there that can mimic public sector pension benefits. How many Silicon Valley millionaires do so right now? Keep in mind that some insurance companies have higher S&P/Moody rating than some state governments. But I don't see the Silicon Valley millionaires buying annuities en mass.
Posted by: kanchou | Aug 6, 2007 11:54:31 AM
Stephen,
Prescott has a nobel prize and data; you have a blog. Whom am I to trust?
Posted by: hmmmm | Aug 6, 2007 12:00:21 PM
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