For and Against a Maximum Income

Dylan Matthews has been in a sort of funny Twitter argument with N+1′s Mark Grief about his article “Gut Level Legislation; Or, Redistribution” which proposes “Add a tax bracket of 100 percent to cut off individual income at a fixed ceiling, allowing any individual to bring home a maximum of $100,000 a year from all sources and no more.” Yesterday, he took to his blog to offer a more detailed response, but I think his methodological critiques to an extent underscore the fact that he’s slightly missing Grief’s point which is not so much to put forward a policy proposal as it is to lay the groundwork for this bit of cultural criticism:

If there is anyone working a job who would stop doing that job should his income—and all his richest compatriots’ incomes—drop to $100,000 a year, he should not be doing that job. He should never have been doing that job—for his own life’s sake. It’s just not a life, to do work you don’t want to do when you have other choices, and can think of something better (and have a $10,000 cushion to supplement a different choice of life). If no one would choose to do this job for a mere $100,000 a year, if all would pursue something else more humanly valuable; if, say, there would no longer be anyone willing to be a trader, a captain of industry, an actor, or an athlete for that kind of money—then the job should not exist.

As it happens, I think Grief’s analysis here is slightly mistaken because it doesn’t distinguish between compensation ex post and ex ante. People who start new businesses generally fail and end up earning an income of $0 and needing to go through the awkward enterprise of finding a new job. Similarly, employees who leave incumbent firms to go work at start-ups are taking a risk. If you had a hyper-compressed income scale then almost anyone who started a new business or went to work for one would wind up taking a huge cut in their ex ante expected income. Relatedly, once a business was established and profitable there’d be no real reason to expand. The resulting economy would be enormously uncompetitive, dominated by mid-sized firms with local monopolies and horrible service. The liquor-licensing regime in Washington DC largely replicates this dynamic—each neighborhood has one crummy independently owned liquor store and if you don’t like it you can become a Mormon—and it sucks, even if few people understand why it sucks.

Nevertheless, Grief’s provocation underscores something that I think is important and true, namely that at higher levels people are largely engaged in a positional arms race. The main reason a lawyer earning $250,000 a year wants to earn $500,000 is that he’s competing for status with some other guy. Similarly, one important reason high-end consumption items are so expensive is that the people who buy them have so much money. If there weren’t all these rich people around, that house on the Hamptons would be much cheaper and you wouldn’t be so desperate to earn enough money to buy it. These points are important, underappreciated, and should shape our thinking about policy to a greater extent than they do, and I think the Grief piece is a welcome contribution to dramatizing that fact even if the specific proposal has some problems.