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Old 03-21-2011, 06:22 PM   #61
Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 3,635
Originally Posted by MasterBlaster View Post
You are suggesting that changes to tax rates don't matter. I suggest otherwise.

Even at 32/36 % there are those who are on the edge and will stop producing.

And, by the way, a 12.5% tax increase isn't negligible.
I'm sorry if I suggested that "tax rates don't matter".
I assume that somewhere in an economy of 150 million workers, somebody is on the edge of making some decision and a change in tax rates will impact that person.

The question is "How many people are 'on the edge'?" That's where we appear to disagree.

I'm certain that at least one person won't change his behavior, because I've been through tax rate increases and decreases and I've never changed my work effort as a result. In addition, I've never heard one of my coworkers say that a recent change in tax law made them work more or less.

I find it easy to extend my personal experience to the larger workforce. The great majority of US workers don't determine their own hours. Most of us are salaried or hourly with the employer setting our hours. I've worked with commission only salespeople. They could change, but I've never heard one say that a past change in the law changed their effort.

Having said that, I'm still sure there are some people on the edge. Let's see how many need to be there for us to be at the top of the Laffer curve.

Suppose we're comparing rates of 32% and 36%. Suppose 80% of the workforce just keeps doing what they've been doing, so the increase in revenue from this portion is 4% of 80% of total income, or 3.2% of total income.

Now, suppose the other 20% decrease there incomes by 50%. That loses all the taxes that had been paid on half their income, or .32 * .50 * .20 of total income. That's also 3.2% of total income.
But, the gov't picks up an extra 4% of the income they continue to earn, that's a positive .04 * .50 * .20 or 0.4% of income. So even if 20% of workers cut their effort by 50%, the gov't still gains a little revenue.

So this change in tax rates, which is equivalent to a change in after tax income of 68% vs. 64%, would need to cause 20% of the workers to change their effort by 50%. That's way beyond anything that's conceivable to me given the change in take home pay.

Here's something that might be plausible: 90% of workers wouldn't change their activity at all. 10% would change, with an average reduction of 10%. If my math is right, a tax increase that would appear to provide a gain of 4.00% of income on a static calculation actually generates 3.64% of taxes on a dynamic basis. These numbers put us on the extreme left of the Laffer curve.

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