Thursday, October 18, 2007

How Would Normal People React to the Redistributionists?

Today, Prof. Mankiw gives former Clinton Labor Secretary Robert Reich's redistributionist preferences the spotlight. Mankiw, naturally, gives us some thoughts on optimality, but what would be the rational response from those who might be affected to a tax regime such as Reich proposes? Given the dual factors, income and wealth, there would be many "buckets" of likely reactions based on the relative mix of wealth versus income, but the two largest groups are likely to be older folks with asset bases over the $5 million threshold and younger folks approaching or over the $500,000 income threshold. Most of the former would likely have total assets still small enough to be broken up via bequests, charitable contributions and other estate planning tactics into chunks below the threshold. They would have every incentive to do this before the wealth levy went into effect. The latter group, high income earners, would have every incentive to cap their own income just below the $500,000 threshold. One way to achieve this would be to simply stop working. Imagine someone age 42 who has accumulated $4,999,000 million in assets and currently makes $499,000 and whose career/business trajectory will place them over the thresholds in short order. That person could decide that they have enough money to live a cushy life playing alot of golf, skiing and/or taking frequent, splendid vacations abroad (or just staying home with the kids). If you think such people are few in number, you're fooling yourself. There are thousands of people who, with a tidy few million in the bank, would gladly exit the work force and pursue hobbies or other personal, non-career goals. (Speaking for myself, rather than give half my money to Charlie Rangel and Chuck Grassley, I would sure as hell content myself with $4.99 million in the bank while I attempted to become a scratch golfer, Cordon-Bleu-trained chef, and renowned art historian.) The question then becomes, is this what we want for our economy - thousands of talented people on the slopes, links, or in the cafes of Europe, avoiding that higher tax rate, rather than hard at work creating jobs and tax revenue at a lower rate of taxation? Do we want to create a new leisure class out of our most productive and talented citizens?


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