By Kevin Williamson
Thanks to the fiscal-cliff deal and the Obamacare tax, we now
have a tax code that is more “progressive” than at any time since
Jimmy Carter was president. It will be interesting to see
what long-term effect that has on household-income trends. The results may
prove counterintuitive.
Tax increases on
high-income people may be redistributive, but not always in the way intended.
That is because we pay taxes individually in the short term, but in the long
term we pay taxes collectively: Individuals and firms pass on tax costs to
employers and consumers to whatever extent they can, just like any other cost.
But the same factors that make any given worker a high-income wage-earner in
the first place are likely to make that worker one who can most effectively
pass on tax expenses. Likewise, the most profitable firms in many cases will be
the ones that have the most power to pass on tax expenses to consumers or
suppliers.
A high-income
worker is one who by definition is in high demand. The same factors that make
him a high-income worker also enable him to demand higher wages in response to
tax increases or other factors that diminish his real income. You see this all
the time with financial and tech specialists who are recruited to positions in
high-tax areas such as New York or California: Workers in that position, or
headhunters recruiting them, simply add taxes and other cost-of-living factors
into the starting point of income negotiations. A $100,000-a-year job in
Manhattan is not the same as a $100,000-a-year job in Muleshoe.
Likewise,
companies with very in-demand products (Apple, Mercedes-Benz) have the most
ability to pass costs along to consumers, while equally powerful but
price-constricted firms (Walmart) have the most power to pass expenses on to
suppliers and other business partners. A tax hike on Walmart is not necessarily
a tax hike on Walmart — it’s likely to be a tax hike on, for example, Cal Maine
Foods, which relies on Walmart
for a third of its business. In business as in love, the
power in a relationship is always in the hands of the party with the least to
lose by walking away from it.
Which is to say,
it is not clear that you really can raise taxes on the rich, even if you try.
At the other end
of the spectrum, low-wage workers are those who by definition are not in very
much demand and therefore have the least ability to negotiate tax offsets. The
same is true for less powerful firms.
So, let’s say
you’re Walmart, and your top hundred inventory-management, systems, and finance
guys all come to you looking for a 10 percent bump because of the fiscal-cliff
tax hike and the Obamacare tax hike. Walmart does not live and die by greeters
or Cal Maine eggs — it lives and dies by logistics and finance, and it really
needs people who are good at that. It will work as hard to keep its top talent
as Apple will to keep its top engineering and design talent. So where does
Walmart go to get that money to keep its top talent? If you have 100 high-wage
specialists you really need to keep happy and tens of thousands of low-skilled
greeters, cashiers, warehousemen, etc., all of whom you are pretty confident
you can easily replace, you are going to be tempted to shift some money from
the big, low-skilled pot to the small, high-skilled pot. Likewise, if Walmart
has a supplier that represents 0.01 percent of its sales but relies on Walmart
for 33 percent of its own sales, who do you think is going to prevail if
Walmart decides it needs to knock prices down by a nickel?
We may not
consciously plan that kind of thing down to the dime, but people know that
there is a difference between their pre-tax income and their real income, and
people with the market power to maximize the former also have the power to
maximize the latter. Put another way: Even a very progressive tax code “does
very little to alter the market distribution of income.”
It is transfers,
not taxes, which really generate such progressivity as we have in the United
States. As Lane
Kenworthy shows, the overall U.S. tax system — federal,
state, and local — is not all that progressive in its effects, despite a very
progressive graduated federal income tax. What low-income workers don’t pay in
federal taxes, they make up for in state and local taxes, particularly sales
taxes, which are basically a flat income tax for the poor. Kenworthy finds that
each quintile pays about 30 percent of its income in taxes. But the system
becomes much more progressive when transfers are accounted for.
Tax hikes on the
so-called rich may decrease the private sector’s share of income, but they
probably will not do much to decrease the real income of high-wage workers and
may in reality increase government revenue at the expense of low-wage workers
in the long term, though it is very difficult to disaggregate the complex
relationships between taxes, wages, and prices. But those who say that they are
most interested in economic inequality would do well to follow Kenworthy’s
example and look at transfers rather than taxes. Means-testing Social Security
and Medicare would do more to make the total package of taxes and transfers
more progressive than any tax hike likely to pass Congress in the foreseeable
future. It is also a reform that many conservatives and deficit hawks could
support. This should be persuasive to those on the Left whose interest in tax
hikes on the high-income is not strictly punitive, but I am afraid they are a
very small minority.
– Kevin D.
Williamson is National Review’s
roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will
be published in May.
1 comment:
ROFLAMFLOL...
Great article...
As I said, it is always the Democrats or progressives supporters, poor, needy, unskilled, and Dems constituents that gets badly hurt... And it is always their demise that comes about first...
Great read...
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