Would Raising Taxes Lead to "Economic Collapse"?

So I spent enough time crafting this response to Mike (USMAilllini) that it’s gonna get it its own post. Below I reference a book that shows that there is no real evidence that the tax rate significantly affects economic growth or labor supply. I think that’s important enough to warrant a new post.

Proposition: "There would be an 'economic collapse' if we increased taxes as high as we suggest."

First of all, I never said people would work for the "common good." I definitely advocate allowing highly productive employees to keep part of the fruits of their productivity. As I say elsewhere on my blog, I would be willing to tolerate a, say, 5:1 ratio of richest to poorest individual. That's radically lower than the ratio now, but being able to buy 5 times as much as a "slacker" sounds like plenty of motivation to me. Think about it: that's literally five times as many Little Debbie cakes or Playstation 3 games.

I understand that you (Mike) are a highly motivated individual, and that you don't think you would work as hard if it didn't pay. But as you suggested to me yesterday, we have to step back from what we think our own reaction would be when we analyze this. Motivation is a complicated beast; it is not just a simple matter of how much money you get. Status, self-respect, and professional prestige come into play as well. Whatever it is that motivates us, the simple fact of the matter is that tax rates as a share of GDP do not have any tangible, discernible effects on economic growth rates. See "Taxing Ourselves: A Citizen's Guide to the Debate over Taxes" by Joel Slemrod and Jon Bakija, pp. 119-120. Nor do marginal tax rates have any significant effect on labor supply (almost none on male hours worked, some but not a huge effect on female hours worked). Id., p. 125. And it bears remembering that the U.S. experienced its golden days of economic growth when the top marginal income tax bracket was over 90%.

Of course people are going to work somewhat less (probably not that much less, but a little less - see above) if we significantly raise the top income tax brackets. But a.) what work we do may be more productive if we use the taxes to finance research, technological development, and generally accessible education, and b.) we work way too much now anyway. Look, for instance, at lawyers in big firms. They work long hours in exchange for gobs of money. As a result, they have some of the highest rates of alcoholism, drug use, depression, and suicide of any profession. If under my system they work 35 hours a week instead of 60, I'm fine with that. Similarly, if a few more mothers are going to drop out of the labor force to take care of their kids, I'm fine with that too.