Tax Me More?

February 8, 2009

Last week, Netflix founder and Chief Executive Reed Hastings penned an op-ed, asking to be taxed more:

This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It’s a terrible idea. We all want the taxpayers’ money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.

Perhaps a starting place for “tax, not shame” would be creating a top federal marginal tax rate of 50 percent on all income above $1 million per year. Some will tell you that would reduce the incentive to earn but I don’t see that as likely. Besides, half of a giant compensation package is still pretty huge, and most of our motivation is the sheer challenge of the job anyway.

My first thought that “capping compensation…will just make it that much harder…to hire and hold on to the executives” contradicts “I don’t see [reducing the incentive to earn] as likely,” and essentially denies the truth that incentives shape behavior. Nevertheless, the bigger issue I have is confusing what someone thinks he or she should do, with what should be forced by law.

Mr. Hastings and anyone else are free to send extra taxes to Washington, and those checks will be cashed. (The address is Attn Dept G, Bureau of the Public Debt, P.O. Box 2188, Parkersburg, WV 26106-2188; the fund received over $2 million last year.) But just because Mr. Hastings thinks that the best use of his money is to be part of the government’s budget, that doesn’t mean the best policy is to force everyone to follow his lead.

Raising marginal tax rates will result in some loss of economic activity. At the same time, not all government spending is equally beneficial, and some may very well be harmful or wasteful. “There are unmet needs, therefore tax rates should go up” is an argument that’s part of our national tax and budget debate, but it’s not a trump argument.

As for the view that those with “outsized earnings” ought to “pay for the needs of the nation,” the data should be part of that conversation. In 2006, the top 1% paid 39.89% of federal income tax collections; the top 10%, 70.79%; the top 25%, 86.27%; and the top 50%, 97.01%.

In the meantime, maybe the feds should follow the lead of some states and add some “voluntary contribution” lines to the 1040. (Many states allow taxpayers to add on additional payments to the state or various funds or charities.) The line could even be the difference between a 50% rate and what the taxpayer already pays.

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