Taxes Discourage Work, Encourage Leisure
October 9, 1996
Although William S. Vickrey and James Mirlees -- yesterday's announced co-winners of the Nobel Prize in economics -- are political leftists, they don't suppress evidence distasteful to their personal views.
While the Nobel committee cited them for studies on "asymmetric information," it also recognized their important research revealing that low marginal tax rates are far more preferable than high rates.
- Columbia University's Vickery had written that the marginal tax rate on the highest skilled person in society should be zero, noting there is "no point in deterring him from earning the last dollar of income, since if he does not earn it there will be no revenue from it."
- He found that by taxing work and not taxing leisure -- even though there is a certain "imputed income from leisure" -- taxes encourage leisure over work "to an uneconomical extent."
- Joining in this "don't kill the goose that lays the golden egg" argument, Cambridge University's Mirlees -- a former adviser to Britain's Labor Party -- calculated, to his own surprise, that the top marginal tax rate should be no more than about 20 percent.
- Moreover, he found that the 20 percent rate should be the same for all taxpayers -- a flat tax.
Vickrey put forth other ideas of interest to free-marketers. So as not to waste scarce resources, producers should be allowed to charge market prices for goods and services for two reasons.
- Allowing producers to price their own wares means they will have an incentive to provide what consumers want.
- Consumers who value them most will get them -- and others will have an incentive to avoid waste.
Applying such ideas to roads and bridges, he proposed that "peak load" prices be charged at times of high usage -- resulting in the highest value usage of the facilities and reduced congestion. He also proposed making toll collection on freeways less disruptive by equipping vehicles with electronic identifiers. Such devices were subsequently introduced and are today used on some toll highways.
And thus does the "dismal science" impact our daily lives.
Source: David R. Henderson (Hoover Institution), "When Economics Rises Above Politics," Wall Street Journal, October 9, 1996.
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