Why Do You Care How Much Other People Work? Revisited By Paul Krugman

Greg Leiserson has an interesting post on assessing tax reform, in which he argues that distribution tables — showing the direct gains and losses from a tax change — properly measure welfare gains, and don’t need to be revised to consider the induced effects on labor supply, effort etc.

This caught my eye because I made a similar point three years ago with regard to projections of labor supply reduction from Obamacare.

The point in each case is that while changes in taxes or transfers may induce changes in how much people work, when you assess these changes you have to bear in mind that, to a first approximation, workers are paid their marginal product. This means that if increased transfers induce some people to work less, it also causes them to earn less, so that the rest of society isn’t any worse off; if lower taxes induce high earners to work more, it also means that they’re paid more, so that the rest of society doesn’t reap any of the gains.

This is also, by the way, the logic behind the Diamond-Saez proposition that the optimal top tax rate is the one that maximizes revenue: aside from the taxes they pay, increased effort by the very rich to a first approximation makes no difference to everyone else, because the increase in output is fully captured by higher top incomes.

All of this gets obscured by talk about economic growth. Reminder: workers care about their welfare, not what happens to GDP. Making the rich richer without trickle down does the rest of us no good.

From Paul Krugman's Blog