It's not sufficient to make cliffs impossible, you just never want the effective marginal tax rate go above a certain threshold.

It's insane that we cap marginal tax rates for the wealthy below 50% “because they need incentives to work harder” yet the working class family is facing an effective marginal rate near 100% because of reduced benefits.

The solution would simply be to stop making benefits decrease when salary goes up.

“But it's going to be insanely expensive” one may say, but it's an accounting illusion. All we need to do to break the illusion would be to stop counting gross public spendings and taxes and instead count the net public spendings/taxes for each individual (that is, over the whole population you take the difference between what they pay and what they receive and that gives you how much they contribute or how much they cost, instead of the current accounting system where we count people paying for their own benefits).

What's really expensive is the economic inefficiency of the current system.

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dgoldstein0 3 days ago | parent | next [-]

> The solution would simply be to stop making benefits decrease when salary goes up.

That's an option, and I'd be interested in how the math works especially with predictions of how the economy would respond.

That said I don't think not decreasing benefits is an important requirement. But net income (benefits + earned income - taxes) should be strictly increasing with earned income, and probably at a rate of at least 50% but ideally higher than that up to some reasonable definition of middle class income. It should never be the case that if you earn more you can end up worse off.

	▲	littlestymaar 3 days ago \| parent [-]
		> That's an option, and I'd be interested in how the math works The math works because the derivative of a constant is zero, it's that simple. > That said I don't think not decreasing benefits is an important requirement. But net income (benefits + earned income - taxes) should be strictly increasing with earned income, and probably at a rate of at least 50% but ideally higher than that up to some reasonable definition of middle class income. Exactly, it doesn't need to be fixed, we could also have decreasing benefits, simply with a much lower rate of decrease (ideally the rate of decrease should be the marginal tax rate for this income). But in practice such a system would be much more complex than a flat benefit system for little gain (the more limited the decrease rate is, the closer to a flat rate your public spending would be).

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zozbot234 3 days ago | parent | prev | next [-]

Actually, optimal taxation models tend to show that a base transfer at zero income with an initially "high" marginal rate for clawing back the transfer at the lowest end (but still no higher than 100%, and falling very quickly as earnings increase!) works very well. (Marginal rates then rise progressively for higher incomes, and paradoxically become lower again at the very top end, trending towards zero at the extreme top-end of the scale. This is actually a consistent result in non-linear incomes taxation models; the very top earner should face zero marginal tax on the very last cent she earns!)

The intuition is that you only "feel" the high marginal rate if you earn very little, which impacts very few people; but the effect of making the break-even point more manageable with lower marginal rates for most earners is felt throughout the incomes scale. What really screws up things is higher-than-100% marginal rates, which are regrettably common in real-world systems amd completely useless.

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littlestymaar 3 days ago | parent [-]

I'd be curious to read more about that, because none of what you've written makes any sense to me right now. (Why would we want zero marginal tax on top earner who already get zero marginal utility for her money in the first place ?).

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zozbot234 3 days ago | parent [-]

The zero marginal tax only strictly applies to the very last cent the extreme top-earner is expected to earn in the tax period. The idea is that at this theoretical extreme top-end tax bracket basically no one is paying infra-marginal taxes, hence the share of the incentive effect compared to the pure revenue effect is maximized. So you'll want to ensure that this extreme top-earner is only paying in lower, infra-marginal tax brackets, which have no incentive effect on her. This cannot be done literally because of randomness and uncertainty, but the broad effect of paradoxically lowering optimal marginal rates at the top end is nonetheless real.

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littlestymaar 3 days ago | parent [-]

It's only real if you assume top earners have monetary incentives to work more, which is a very bold assumption in a world where the top earners don't even earn money through their work in the first place.

And again, the utility of income for an individual is logarithmic with regard to their income, which means the marginal utility is the inverse function and that never stopped the top earners to want more.

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zozbot234 3 days ago | parent [-]

Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income.

(Besides, optimal taxation models also say that capital income should not be taxed at all, and you should concentrate "capital" taxes on sources of pure rent instead, with the rest of the burden falling on labor income and/or consumption! The intuition is that taxing invested capital is basically double taxation, since the apparent "returns" on capital are in fact wholly accounted for by time value and risk. There are important offsetting arguments, but these also become less relevant at the extreme top end of the scale.)

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littlestymaar 3 days ago | parent [-]

> Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income.

If the CEO has a significant voting power in his company, then it's capital income even if the said income is “a salary”. Like it or not.

> Besides, optimal taxation models also say that capital income should not be taxed at all

It would be nice if people advocating for their political view could stop labeling their view as “optimal”, but hey, this is economics so here we are.

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zozbot234 3 days ago | parent [-]

The optimality results are drawn from modeling assumptions that happen to be fairly general, not from any specific political views. For instance, much of the real-world political advocacy of UBI or cash transfers towards low-income folks is downstream from arguments about the predicted efficacy of this as a kind of redistribution; the arguments are not themselves politically motivated. The argument for taxing pure rents only, as opposed to productive capital, is structurally quite similar; as is the general argument for paying careful attention to incentive effects at the top end of the income distribution.

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littlestymaar 2 days ago | parent [-]

> The optimality results are drawn from modeling assumptions that happen to be fairly general, not from any specific political views

The idea that someone rich would “work less and thus produce less value to the society if their marginal tax rate was non-zero” isn't “fairly general” it's straight Randian and it's not how the world works. Same for the idea that individual income reflect the value they create to society.

The idea that you ought not to tax capital is also politically motivated.

Anything can be said to be “optimal” if you pick the hypothesis accordingly, and that's exactly what's being done here… It may work on paper for a world populated by a spherical John Galt in vacuum, but it tells you nothing about the real world.

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zozbot234 2 days ago | parent [-]

> The idea that someone rich would “work less and thus produce less value to the society if their marginal tax rate was non-zero” isn't “fairly general” it's straight Randian and it's not how the world works.

People generally tend to work in exchange for money, and the more money they earn thereby, the more effort they'll want to put in their work. (This broad idea is sometimes known as "efficiency wages"; it often leads to paying workers more than they could directly compete for on the market!) Some independently rich folks may obviously choose not to work in any high-paid job at all, but given that they are, it makes sense to ask what motivates them.

> Same for the idea that individual income reflect the value they create to society.

That's obviously not true, since positive externalities, negative externalities and pure transfer rents all exist. Some people might well end up creating more value to society than their income accounts for, others less.

(I actually stated above that the zero-taxes-on-capital result is somewhat unrealistic on its own and there are arguments that do push the other way, so the current notion of what should be taxed may in fact be roughly adaptive. In practice, it's often more important not to push too far away from optimality with punitive levels of taxation than to precisely match the outcome of any given theoretical model.)

	▲	littlestymaar 2 days ago \| parent [-]
		> People generally tend to work in exchange for money, When they need it. Healthy retired people regularly do work for free in various charities and community work. Working people also don't usually seek to maximize their income, but balance it with plenty of factors. > and the more money they earn thereby, the more effort they'll want to put in their work. (This broad idea is sometimes known as "efficiency wages"; it often leads to paying workers more than they could directly compete for on the market!) This only works up to a point, you can't pay a taxi driver a million bucks in the hope of getting to destination 10 000 times faster. People do work better and harder when they feel they are fairly compensated vs when they feel they are being abused but that's it. > Some independently rich folks may obviously choose not to work in any high-paid job at all, but given that they are, it makes sense to ask what motivates them. And the answer is not the income proper, but everything that comes with such jobs and income, particularly “I'm making more money than Bob”. As long as Bob and him are being taxed similarly, then the actual amount makes little difference. As I said above the marginal utility of money converges to zero the more money you have: a million dollar would change the life of the median US worker but wouldn't even be noticed by Tim Cook. (And even a billion doesn't change Jeff Bezos perception of worth an inch). > In practice, it's often more important not to push too far away from optimality with punitive levels of taxation than to precisely match the outcome of any given theoretical mode The concept of “punitive taxation” is in itself a political one, and again I can build a model in which the optimal income taxation is 100% above 1M and then say “we shouldn't push too far from the optimal” and that would be equally nonsense.

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CalRobert 3 days ago | parent | prev | next [-]

I agree with you, but for what it’s worth I live somewhere top marginal rates are about 50% and indeed 32 hour weeks are very common. I think this is a good thing though.

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eru 3 days ago | parent | prev [-]

Yes, looking at the net transfers makes more sense.

However, net transfers aren't a function of income alone. They depend on lots of factors, because they are plenty of benefits that depend on more than income and plenty of taxes like that, too. Eg capital gains taxes and property taxes and sales taxes and tariffs don't depend on your income.