A Fascinating Exchange on Implicit Marginal Tax Rates

by Reihan Salam

A commenter at Andrew Gelman’s blog writes:

I’m a recent college grad making 50K. It very much feels like I have the same expendable income as I did when I was making 18K.

But, even if that is true, which I often concede it might be, it is also true that I can’t get to 80K without going through here, which keeps me from returning to waiting tables.

This is a big part of the upward mobility story: where do you see yourself in a few years, and what will you do to get there? For people who see the deck of life stacked against them, it doesn’t make sense to make the choices, and the sacrifices, that come naturally to people who’ve been steeped in middle class norms since birth. 

I recommend reading Andrew’s post, which considers the question of why a worker might choose a higher-paying over a lower-paying job even if taxes and transfers meant that one would be left with the same amount of disposable income:

For any particular job, it’s typically less pleasant to work more, so if you can choose your hours, you have a choice between more money and more leisure. But most people can’t typically choose between a minimum-wage job and a $60,000 job. So the short answer to, Why don’t people quit their jobs and work at minimum wage?, is that their working conditions would be less pleasant.

Identity matters. There are many people who will, for example, trade income for autonomy. This is so common as to strike most of us as unremarkable. Yet the happiness that autonomy-lovers derive from autonomy can’t be taxed! It is, in a sense, a brilliant scam, and one that can give us a misleading sense of the importance of rising wage dispersion.