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Forcing us on to the market is government slavery. Progressive income taxes disincentivize slave holders.

Technically, Anon, progressive income taxes disincentivize the "slaves," not the "slave holders."

Anon -- what is the difference between government slavery and wage slavery?

"If my after-tax pay from working another hour at my day job is very small, then I will" need to work a lot more hours at it before I can afford to retire.

I fixed it for you :)

"I fixed it for you :)"

Thanks :)

Upon reading this, I immediately felt a bit... off.

I completely agree with this on a macroeconomic level, but on a personal level, I felt like, well, that specialization kills us, a bit. More and more psychology is showing that flexibility and change in behaviour are the best things for the brain and long-term health. The idea of getting rid of home production was immediately repulsive because it made me imagine a world in which we do one thing, and lose our plasticity.

Of course, civilization is based on this principle, I know. No one ever does everything for him or herself. But, when I think of the happiest and healthiest people I know, they're people who grow their own herbs and don't just get everything from the grocery store. They sew and alter their clothes.

And I know this counts under leisure and work in your post. And I know that, if we became more productive, they would be able to do it more. But many of these people started these activities because they had little money, and then grew to love it. In a situation where over-specialisation is encouraged and working overtime is a viable solution, this may not be the case.

Assumption that society can be optimized by MAX(GDP)is both simplistic and troublesome.

Ignores future generations, natural environment, outgroups, disadvantaged etc.

MIN(INEQUALITY) has shown time and time again to leads to overall healthiest societies (vs "happy hedonists").

How to raise all boats?

q,

Just to be clear, raising all boats isn't the same as minimizing inequality. I suspect if you had reliable statistics you could establish that North Korea has the lowest level of inequality in the world, if only because most of the society lives at a more or less (typically, less) subsistence level. Hardly a happy or healthy society.

So let me get this straight. Income tax increases will make people work less and cut their own lawn instead of having to hire someone. This is supposed to make us WORSE off? This shows just how silly you can become when you confuse 'GDP' with 'economic well-being'. They are not the same, and this is a good example of where they diverge.

What you call 'home production' can be:
- Cooking your own food instead of eating at McDonald's
- Spending time with your children instead of spending more money on daycare or TV
- Doing your chores instead of hiring a maid

All of these things increase the quality of life, even if they reduce GDP.

You're also assuming that higher income tax rates reduce hours worked. But there are all sorts of other incentives that affect work hours, especially in creative/innovative professions. There's the desire for advancement and promotion, prestige, the pleasure of the work itself, sheer workaholism etc.

All of these things increase the quality of life

Are you sure? There's a reason why they're called 'chores'. People who have the means to avoid doing them usually try to do so. There's a reason why rich people hire personal assistants, and why personal assistants don't work for free.

"Cooking your own food instead of eating at McDonald's"

There's an implicit quality/healthfullness assumption being shoehorned in here. What if the choice is between me cooking and going to the local vegan restaurant? Does my refusing to go to ever go the vegan restaurant increase my quality of life? Note: I'm a LOUSY chef.

I'm really glad that Stephen and Mike make those points, because they'll get more credence coming from the bloggers themselves. But I will point out that there's a huge level of presumptuousness in saying that "x" makes one's quality of life better and "y" makes it worse. X and Y are different for everyone, and every day I see people making choices that I wouldn't want to follow in a million years and yet presumably it makes their lives better (or at least they believe it does, and who am I to tell them otherwise?). Nothing makes everyone's quality of live universally better or worse. Or, rather, there are no trade-offs that make everyone's quality of life universally better or worse.

And Mike, I don't think your friend was very smart (at least, not on this point). He or she was assuming to know what's best for society (not just individuals). Some people are happier and better off at work, others at home with their kids, some don't have kids, some hit their kids, for some the alternative to work is drinking alone in a seedy bar, some people like drinking alone in a seedy bar, some people would use leisure time to great a great novel, and some would use it to cook up a Ponzi scheme.

There is no way to say what makes each of us better or worse off. It's hard enough for us to figure that kind of thing out for ourselves, let alone for others, let alone for strangers!

This issue isn't about social optimization, it's about liberty - the liberty to make our own choices about how much (or, if you prefer, how little) we work and how we spend our time. Without, of course, infringing on anyone else's like liberty (yes, it will make you more free to get someone else's money given to you. It's still not yours to take).

"If my after-tax pay from working another hour at my day job is very small, then I will not bother to work that hour, and use that time to cut my lawn or clean the bathroom, activities where I lack a comparative advantage. "

Er, what planet are you working on? How about starting from the world of work as it actually is, where most people have either fixed hours or a salary, instead of some bogus marginal analysis that does not really apply. Tell me how you operationalize this principle in your work life.

But even at face value, there are both income and substitution effects from a change in after-tax wages.

Bob,

Good point about N.Korea, but you were assuming that MIN(INEQUALITY)is soley based on economic(eg wealth & income) indicators. The formula would also include equal opportunity for voice & representation in government, where North Korea and all other dictatorships fail. North Korea fails on so many other levels as well.

See: http://www.un.org/en/documents/udhr/ for the factors that sould be included in MIN(INEQUALITY).


Marc, it's very common for a job to offer the possibility of working more (overtime) or less (part-time, flex-time). And there's always the possibility of switching jobs if you want to work more (or less). That's a bit more drastic an option, but it's hardly extreme.

I don't think this post was out of the real world at all.

Approx 60% of workers are paid hourly wages in N. America, and I'd bet a lot of them have the option of working overtime and/or taking vacation pay in lieu of vacation hours.

Many salaried workers have to make the decision of how much unpaid overtime they will put in, which is often driven by desire to get promotions or raises. The value of those promotions and wages are, in part, a function of the tax rate.

There are all kinds of decisions that go on at the margin.

"Over one in five employees (22.6%), about 2.9 million, worked paid or unpaid overtime in a given week in 2007. This is an increase from 1997, when 18.6% of all employees worked overtime. In 2007, these employees worked an average 8.6 hours per week in excess of their usual hours, somewhat less than the average 9.3 hours in 1997. Employees were slightly more likely to work unpaid (11.4%) than paid overtime (10.4%) in 2007."

http://www.statcan.gc.ca/pub/71-222-x/2008001/sectionh/h-ot-hs-eng.htm

That's just the overtime question. Then you need to also consider the part-time/flex-time vs. full-time question as well as the job switch questions that Adam raises. Plus there are questions of skill development - why take a night course to raise your skills at a job, if a large portion of the increase in wages will get eaten up by taxes.

There are all kinds of decisions being made at the margin, if you're willing to go out and look for them.

At 10%+ unemployment, overtime should be minimalized.

... not to mention to whether to work a second job or to leave the workforce altogether (for example, to stay at home with the kids). Those strike me as the ultimate decisions made at the margin, at least in terms of hours worked in remunerated employment.

It can certainly be claimed that labour supply elasticities for people in low-income households are smaller. In this study, the estimated tax elasticities decrease with income. But it's still that case that - with the exception of married women in the lowest income group - they are positive and significant.

This blog is actually an argument for a flat personal income tax, not personal income taxes per se.

We can take Mike's argument further as well, using something that Stiglitz and Sen said in that report on alternatives to GDP for Sarkozy.

They make, as Mike has done, the point that there is indeed home production. They then go on to consider how to value it.

OK, now they're trying to value it so as to give us a number which we can add to GDP....for obviously, home production is production, even if it's not the market production that we include in GDP.

So, they say the "general undifferentiated labour rate". In most places this will be minimum wage.

Now, remember, they're measuring the value of the labour going in because they can't measure the actual output. But that's OK, that's pretty much what we do with government in GDP figures. What, is spent on govt is, in the GDP figures, the value of government.

So, if we're valuing labour at minimum wage when it's used in home production, what does that tell us about the added value of specialisation? Well, average labour rates across the economy are rather higher than min wage (at least, they'd better be!).

In the UK the min wage is £5.91 an hour. Average wage is something like £12.00. So, on average, the specialisation and division of labour makes us twice as productive.

US average wage is $18 maybe? Min wage is $7.25? Similar sort of story there.

OK, this is very rough and ready but the logic stands. If the labour used in home production should be valued at x and market labour at x plus y then y is the addition in value to labour of the division and specialisation of labour made possible by the market.

Tim's post using real numbers encouraged me to look at Mike's argument using Ontario's numbers.

Min. wage was recently raised to $10.25. Assuming 2000 hours per year, roughly $20k per yr. If I'm reading the tables correctly, up to $37k per year, marginal tax rates are 20.5%.
http://www.taxtips.ca/taxrates/on.htm

So, in what circumstances, under purely economic reasons, would one not work longer hours, but rather do "Home Production"?

Well, if your hourly rate is below $10.25 x 1.205 ~ $12.50. Above $12.50, you'd be better off staying at your day job.

Now, suppose they pay you time and 1/2 or double time for weekends? Better still to stay working.

How about the top marginal tax rate? Again, if I am reading the table correctly, over $127,021 you pay 46.41% marginal tax. $127,021 / 2000 hrs = $63.50 /hr. And after tax = $63.50 x (1-.4641) = $34.03 per hour. Still makes sense for me to stay at my day job rather than do "home production", even if they don't pay me time and 1/2 or double time.

Good in theory. Fails in practice.

Interesting, but nobody learned how to make a flat screen TV in their garage.... they needed subsidized school (to make sure the best minds have a chance to collaborate even if they don't have money), subsidized co-op placements in tech firms or labs to gain experience (otherwise why would they be hired), minimum wage requirements in a field they don't specialize in so they can balance work and education during the school year etc.

All these needs are satisfied by tax dollars... is this factored in your argument too??? or are we still talking about making pins and stools?

Rick has a good point when he said that there is a lot of needs that are satisfied by tax dollar. So if there is no Personnal Income Tax, we have to pay somehow to all the services provided by the government or would rely to the market if there is a demand and to inefficient home production ( or charity or foundation) when there is none. It is so easy to say that governement are ineficient with our tax dollar and that we would be as an individual more efficient in the use of this extradollar. It remains to be proven.

As well, it remains to be proven that people for the sake of productivity has to specialize and add working hour in their comparative advantage. I don't see people and myself so unidimensionnaly. Maybe it is just the opposite, working less but more efficiently instead of adding additionnal hours. With knowledge job, it is certaintly not proven that adding hours will lead to better productivity or even marginal gain because probably these people in that of creation value already work 7 days a week without wanting it. They need leisure time and time off to think out of the box...

As for me, I am very happy to pay my Personnal Income Tax and would really appreciate working less so I can have more leisure time because we live in a great civilization where the economy is one part of my life but not by far the most important in my decision making and use of time. On a personnal note, I cannot see in the foreseable future how government can effectively reduce Personnal Income Tax. It would be so irresponsible.

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