Posted Wednesday, Aug. 8, 2012, at 3:36 PM
Hamilton Nolan came up with the inspired idea of trolling the internet with a proposal for a 99 percent marginal tax rate levvied on income of over $5 million a year. To be clear, I think this is a bad idea. As Nolan acknowledges, this is a tax rate that would put you on the wrong side of the Laffer curve. I happen to think that raising tax revenue is important—it pays for public services and can increase the welfare of the poor—so this kind of beyond-confiscatory taxation is counterproductive. But it's a better idea than Derek Thompson gives it credit for.
Thompson levels three objections. One is tax evasion, which I'll grant him though it's a kind of weak objection, the other is incentives to work hard, and the last is inflation. The hard work is, I think, the most wrongheaded. Tim Cook's not going to forget that he wants to go down in history as the guy who took over Steve Jobs' company and made it even more awesome just because of some lame $5 million cap on compensation. We actually have practical experience of a world where CEO pay was, in practice, constrained by super-high tax rates. People still worked! They worked for honor, for glory, for power, and for status. Those are probably the exact same reasons they work hard now—people are just competitive. What's true is that executives would probably pay themselves less, and waste more money on weird nonsense. You'd see more very expensive investments in lavish corporate headquarters' and perhaps a return to the idea of the blue-sky research lab. The point is that being in charge of a company that's profitable enough to pay its CEO a ton of money is a great situation to be in even if your tax rate is super-high. Maybe you can't pay yourself more than $5 million a year, but you still get to be the guy who decides what the money does get spent on.
By the same token, I think the inflation idea is weird. If you tell Michael Duke he can't pay himself more than $5 million, he's not going to give that money to Wal-Mart's workers instead! He's going to build an awesome corporate training center for Wal-Mart employees in Hawaii or whatever. It's going to be fine.
I think all the really big macroeconomic problems here relate to investment income. If you cut off the possibility of reaping windfall gains, then you encourage everyone to invest their money hyper-conservatively, which is going to lead to stagnation. And if someone does stumble into a very valuable investment somehow then capping income at $5 million a year would encourage mismanagement of the underlying assets. But apply a 99 percent tax rate to labor income and I think we'd survive just fine, much as we used to survive with a 90 percent marginal tax rate. The issue isn't that rates that high somehow destroy the economy, it's just that they don't raise any revenue. You can't pay for Medicaid or Pell Grants with your resentment of rich people, you need to set up a tax structure that actually gets money into the hands of the government.