Brad DeLong writes:
I don’t understand how any professional economist can disagree with the fact that more technology-driven inequality should call forth more social insurance in response.
I do think taxation should be progressive, but the comparative statics are tricky. If absolute standards of living are rising, and credit constraints are being relaxed, economic failure often means no cable TV rather than starvation. That militates in favor of less social insurance, noting on the other hand that we can afford it more as well.
Furthermore greater productivity for the high earners can mean greater deadweight loss from the taxes and in the longer run less innovation and lower living standards (a prize to the first person who in the comments shouts "trickle down!" and accuses me of believing in discredited supply side notions; I’ll also recognize that well-spent government revenue can raise rather than lower the living standard).
Whether "the rich would have worked virtually as hard for less" will depend on social norms. I personally think that "shop at Barney’s slurp my sushi run a hedge fund psycho norms" — at least concentrated in a few percent of the human race — may be better for humanity than the sanity promoted by Bob Frank and Montaigne. The thing is, part of the craziness of these people might include them not wanting to give away half or more of what they earn.
Of course we could calm these people down altogether (or maybe not, or maybe letting them run a hedge fun is calming them down), but I’m not sure we want to.
What about me? I could read Epictetus all day long for free, listening to my already-purchased Indian classical music CDs and blogging for you all. But at fifty percent marginal rates of taxation or higher, I would work considerably less at the margin. I don’t look at a budget, to me the extra work "just don’t seem right." Maybe it’s because I don’t play the ultimatum game like a chimpanzee. But in any case for many people I think there is a significant notch effect at about 45-50 percent and up for the tax rate.
I might add that serious egalitarian-oriented health care reform — if indeed it succeeded — would significantly lower the case for greater progressivity of taxation.