In my previous post on cutting taxes on the rich and inflation, I explored Jame’s Kroeger’s thesis that, past a certain point, tax cuts for the rich just inflate the price of positional luxury goods and hence do not benefit the rich people. I found some supporting evidence, such as the CLEWI rise and the evidence that marginal tax cuts aren’t good for growth (i.e. don’t increase production).
Apparently we aren’t the only ones to note this type of argument, as I stumbled across something similar in Moshe Adler’s Economics for the Rest of Us. Adler argues that inequality may create price inflation, by giving firms with market power an incentive to provide fewer goods at higher prices. The logic is simple: if the distribution of income is more unequal, the rich will be willing to pay significantly more than the poor and so, in absence of ability to discriminate, the profit maximising price for a firm will be higher.
Adler has a variety of supportive evidence. Firstly, he cites the 14% decline in musicians performing at concerts, instead choosing to perform at private parties for larger sums, and netting a 20% increase in revenue to boot. Secondly, he notes that in New York, high square footage apartments bought by the rich have been on the up, in conjunction with a more than doubling of price per square foot. Thirdly, he mentions that doctors have begun to charge large sums for face time, and as a result are seeing fewer patients. To top it off, he presents survey evidence that rich people often only do these things because other rich people do them, rather than because they need the extra space/goods/time. This is in line with Kroeger’s ideas about positional luxury goods.
But the problem here isn’t just about price rises. As Adler notes, inequality actually reduces the size of the economic pie as well as altering the distribution of it, because fewer goods are provided at a higher price.
The net result of these effects is that fewer goods are produced, and the rich do not get anything that they wanted before other rich people had it, whilst the middle and poor get less. This is pretty substantital evidence against low marginal tax rates.