by Adam Ozimek
I recently argued that the fact that people in the top of the income distribution already work a lot suggests little room for an added boost from cuts in the top marginal income tax rate. Here are a few added points on this topic.
- Yes, there are other margins of labor supply other than hours worked and employment. But the extent that people are not responding to higher taxes by reducing these two most prominent measures of labor supply is very suggestive. Certainly at other points in the distribution, hours worked and employment appear to be relevant margins that people cut back on. And for the U.S. overall, prime aged people working less seems to be a bipartisan concern. So it is strange to see a pivot in this context only to the claim that "obviously hours worked and employment aren't important labor supply margins".
- One of the other possible labor supply margins is that people could invest more in their education, or take "harder" jobs that pay more. But when we look across the economy broadly and look at what appear to be the major weaknesses, how often does "skilled people aren't working hard enough" appear as a plausible theory?
- Not only do the most skilled people work a lot, but the amount they work has gone up over time. Consider this recent paper that tries to explain the demand for living in the downtown core of cities to "high-income households working longer hours". Is the theory then that the growing returns to skill and other economic factors have pushed high income households to work longer hours but in "easier" jobs along some other dimension? It's certainly possible, but I don't think this will be more than a minor factor and not a margin along which one would think it is urgent for public policy to push.
- The prime-aged employment to population ratio in the top quarter of the earnings distribution is 88%. The overall U.S. employment to population ratio has never been this high. In fact the overall U.S. employment to population ratio has declined over time and it still below pre-recession levels. This seems more like the kind of place we'd look for public policy to try and do more.
- It's useful to compare hours and employment to the lower end of the income scale where marginal tax rates can be extremely high due to means tested welfare programs. Hours and employment certainly seem like highly relevant margins here, and this looks like a more urgent issue where tax dollars will be more fruitfully spent.
- The current top marginal tax rates kick in at $418,401 for a single filer. Are we to believe that the taxes on the earnings above half a million a year or more are affecting human capital decisions in a significant way? I would say at their current levels, very few people are considering top marginal tax rates when deciding their career paths.
- You can always argue about boosting investment, but cutting the taxes paid on labor income seems like a very indirect and poor way to do this.
- Again, overall it's hard to make the case that we are suffering from a dearth of high skilled, high ability, potentially high earning households who are simply not trying hard enough. There are many big obvious problems in our economy, and if this is one it is minor, subtle, and exists only in unseen data that contradict the seen data.
- Relax conservatives, this is not a case for hiking top marginal tax rates to the sky.