Wednesday, October 20, 2010

Higher Taxes Do Matter

Commenting on Mankiw's post, an author wrote "Why Higher Taxes Won't Backfire," and I commented:

Yes, you are right that people who receive fixed paychecks probably will not put in any more or less hours based on the tax rates. But I do not think you can generalize this to all lines of work. People do think at the margin and if something becomes more expensive, you do less of it. If a business owner already works a lot to promote his business, he will have to decide whether it is worth putting in additional hours if those additional hours are less compensating. He already has the incentive not to put in the extra hours because he may want more leisure to spend with his family, or weekends etc.. But then he is going to reduce the financial incentive on top of that? I think the conclusion is clear.

Or what about the person who does currently have a fixed salary and has a business idea. At the 25% tax bracket, perhaps the math works out so that he can earn a profit on the initial earnings. But perhaps at the 39%+3.8%~43%, it no longer works or isn't worth the additional effort. I am in the 50% (all taxes included) bracket and so it not worth it to me to do consulting on the side for my line of work, but which I would do if the taxes were about half. People who aren't affected by high taxes can make all the claims they want, but only those actually affected by them know the real story.

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