by Mitch Kokai
Senior Political Analyst, John Locke Foundation
One story I’ve often heard on the left is that low marginal tax rates don’t just nudge high-income professionals and corporate executives and the like towards working long hours or moving to more productive regions, where they can command higher incomes; it can also tempt them to engage in self-dealing behavior that could prove destructive, cutting corners to accumulate as much as possible. With higher marginal tax rates, there’d be less incentive to go quite that far, as you’d only capture so much of the proceeds. Nostalgists might point to midcentury America, where corporate chieftains faced much higher marginal tax rates, at least on paper, while at the very least talking a good game about their public-spiritedness. If you believe this story, and I should say I’m not convinced, it’s not hard to see why ultra-high marginal tax rates might appeal to you, even if they wouldn’t boost revenues (or even if they’d decrease them).
What I find striking about this line of argument is its resemblance to the case for immigration restriction. It is possible to accept that labor migration, regardless of its average skill level, can expand the economic pie while still favoring a more restrictive or more selective immigration policy on the grounds that, say, the composition of the immigrant influx has bearing on pre-tax inequality (as a general matter, a high-skill influx will tend to mitigate domestic inequality while a low-skill influx will tend to exacerbate it, in part by changing the composition of the overall workforce). In the case of high marginal tax rates, you can say that yes, high marginal tax rates might represent a hit to GDP, but the benefit of that unrealized economic activity would have flowed to high earners, so let’s not shed any tears. In the case for immigration restriction, you can say that yes, limiting low-skill immigration might represent a hit to GDP, but the benefit of that unrealized economic activity would have flowed almost entirely to the migrants themselves, so it is misleading to suggest that incumbent citizens are bearing a significant cost. In either case, the hit to GDP is seen as less important than some other consideration; it is not enough in itself to settle the argument one way or another.