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Taxation and Motivation

The title of a New York Times article, "Rise of the Super-Rich Hits a Sobering Wall", leads to an excellent discussion and analysis of income distribution.  The authors,  DAVID LEONHARDT and GERALDINE FABRIKANT, describe the topic from both the individual perspective and review macro data.  Subjects range from the experiences of an individual, John McAfee, the founder of the security software company of the same name, to the historical research of Thomas Piketty and Emmanuel Saez, based on Internal Revenue Service data.

The article is accompanied by a descriptive set of graphics that give, at a glance, the entire story of nearly a hundred years of variation in income distribution.



The income distribution changes can be related to changes in taxation.  High taxes change the distribution of income to the benefit of lower income levels.  The greatest share of income for the top earners occurs when the tax rates are the lowest, as in the 1920s and the 2000s.  During the 1940s through the 1970s, when the top tax brackets ranged from 70% to over 90%, the bottom 90% of earners had the biggest share of income.

There are a number of criticisms of high taxes.  These include:

1.  High (progressive) taxes are a negative motivator for business development and entreprenuership.
2.  High (progressive) taxes are simply redistribution of income from those that earn it to those that don't earn it.
3.  High taxes inhibit investment and job creation.
4.  High taxes simply take money out of private hands, where it would be used efficiently, and puts it into government hands where it is used inefficiently.
5.  High taxes penalize success.
6.  High taxes reduce government revenues (Laffer curve).