Tax revenue estimates and positional goods

I’m a bit late to the party on tax revenue estimates where Matt Nolan at TVHE and Seamus Hogan at Offsetting Behaviour both weighed in on the Green’s proposed tax changes.

I would add that although estimating tax revenue is extremely difficult, the behavioural response isn’t that complicated for many people who would be affected by the top tax rate kicking in at an income of $140,000.

This level of income is likely to be received by mid-career professionals who have fixed levels of expenditure on positional goods like school fees, automobiles and mortgage repayments. Reducing their after-tax income doesn’t reduce the level of outgoing cash flow commitments many of these households have.

When you add in the desire to maintain relative status, reducing the after tax income of some people in this category could lead to an effect rarely considered by those on the right – people working harder and billing more hours in order to maintain the same level of after-tax income that they did before the top tax rate increased.

Given that the costs of setting up a contracting structure to benefit from a lower company tax rate of 27% include having to renegotiate your employment arrangements and get your employer to incur costs in order to monitor a different type of contractual relationship, I think the level of behavioural response on this level would be a bit lower than you may think.

Of course it’s all speculation. I would point out that the risk of such a proposal is that if the revenue stream doesn’t match what was expected, something else has to come off the table. Spending some time on Google Scholar will make you realise that the literature couldn’t be easily summarised into a sound bite for Morning Report.