Marginal Tax Rates and Incentives To Work

Paul Krugman makes a couple of very good points about marginal tax rates and their impact on the economy:

[I]f you care about incentives, you should care about everyone’s incentives. The top 0.01 percent may like to imagine that it is the engine of the economy, but there is no good reason to believe that there is anything special about their role other than the fact that they make lots of money. Or to be a bit more specific, there is no reason to believe that there is a larger gap between the social marginal product of super-elite earners and their pay than there is for anyone else. (If anything, given the prominence of dubious financial activities in the top .01’s income, the presumption goes the other way). So if you’re worried about the effect of marginal tax rates on work incentives, you should worry about that effect at all income levels.

Actually, the belief that the wealthy are the “engine of the economy” and everyone else is pretty much disposable has become all but orthodoxy in the GOP of late; hence the ubiquitous use of the term “job-creator” as the new term for “the wealthy,” and hence the manifest conviction that non-executive wages and benefits are to be viewed primarily as business costs to be minimized wherever and however possible. So this may be the rare case when Krugman is being a bit too charitable towards Republicans. But his other point is important, too, particularly if you have internalized the conservative belief that progressive taxes are driving “job-creators” to the point of shrugging off their burden and Going Galt:

Here’s the thing: it’s actually a well-documented fact that effective marginal rates are highest, not on the superrich, but on workers toward the lower end of the scale. Why? Partly because of the payroll tax, but largely because of means-tested benefits that fade out as your income rises.

Conservatives do have an answer for that problem: cut the benefits! Perhaps the work of actual workers is undervalued by the Right, but they do understand somebody’s got to do it.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.