Reply to Scott Sumner on 80% Marginal Tax Rates
On his other blog, The Money Illusion, my co-blogger Scott Sumner argues for an 80% marginal tax rate on consumption for high-consumption people. I admit my surprise at seeing Scott advocate that, which is why it has taken me a little while to process it.
What is Scott’s argument? He writes:
Some conservatives questioned my assumption of very low marginal utility of consumption at very high levels of consumption. I find it completely implausible that ultra-rich get significant marginal utility from extra consumption, apart from the satisfaction of doing better than other billionaires. But note that this sort of “nah-nah, I have a bigger boat than you do” utility would not be at all affected by a tax regime that applied to all billionaires.
Here’s an example. A billionaire might get a great deal of satisfaction from a 400-foot yacht if his rival billionaire has a 300-foot yacht. There is data that shows happiness increases all the way up the income scale. So I do buy that argument. But I would insist that roughly the same enjoyment would be gained from a 300-foot yacht if his rival had a 200-foot yacht. If an 80% consumption tax reduces each billionaire’s consumption proportionately, then could it really impact their happiness? Perhaps I’m missing something, but that claim seems preposterous. That doesn’t mean you necessarily want to go to the very top of the Laffer curve, as there are deadweight losses associated with high MTRs. But unless I see good empirical evidence that those losses are important in the very, very, very tiny labor market for the ultra-rich, I’ll continue to assume that standard public finance theory plus utilitarian values implies that the MTRs on the consumption of the ultra-rich ought to be fairly high.
I don’t know which conservatives he has in mind because he doesn’t provide links and, as Scott well knows, I’m not a conservative.
Now let’s consider his argument. Scott claims that such high marginal tax rates do not “really impact their happiness.” Why? It’s because, in Scott’s view, very wealthy people get their utility from outdoing other very wealthy people. Scott seems very confident of that. After all, he calls the rejection of that idea “preposterous.”
So if he’s so confident, it follows that he would think that very wealthy people would have no problem with such a high-tax policy as long as it applied to all wealthy people. This means that if only very wealthy people were allowed to vote on such a policy, they all should vote for it.
Here’s what I wrote in response to Cornell University economist Robert Frank’s proposal for a very high tax rate, and it applies to Scott’s argument:
Frank argues that consumption taxes on higher-income [substitute high-consumption to apply to Scott’s proposal] people make them no worse off because, as noted, they care about relative income [consumption], not absolute income [consumption]. And, presumably, these people put at least a tiny positive value on the things government would spend the additional revenues on. Is Frank open to testing his assumption? Here’s a test. If he’s right, a majority of those high-income [high-consumption] people, indeed a supermajority, would vote in favor of higher taxes on themselves. Frank should propose a referendum on whether to raise tax rates on high-income [high-consumption] people, with only high-income [high-consumption] people able to vote. If he is right, such a referendum would pass overwhelmingly. I predict that such a referendum would go down in flaming defeat. If I’m right, then the whole empirical basis of his argument is wrong.