Implicit Progressive Payroll Taxes

Robert Frank defends progressive taxes as compensation for the implicit "the costs and benefits of different rungs on the social ladder":

The Tax That Hides in Your Paycheck, by Robert H. Frank. Commentary, NY Times: Every year at tax time, libertarians indignantly denounce government income transfers from rich to poor. Society’s income distribution, they argue, should reflect as closely as possible what people would earn in unregulated private markets. ... As closer scrutiny of that premise will make clear, the libertarian denunciation of income transfers fails on its own terms. ...

Economic theory holds that in competitive labor markets, workers are paid the market value of what they produce. In actual markets, pay does rise with productivity, but not by much. ...

To see the pattern..., consider groups of co-workers who perform similar tasks in your own company. In one case, suppose that your two most productive co-workers leave the job; in the other, suppose that the three least productive leave. Which group’s departure causes a greater loss of value? Most people would answer that losing the top two hurts more.

If so, economic theory holds that their combined salaries should be higher than the combined salaries of the bottom three. Yet the typical pattern is the reverse: any three workers ... earn substantially more than any other two.

In short, the startling fact is that private businesses typically transfer large amounts of income from the most productive to the least productive workers. Because labor contracts are voluntary..., it would be bizarre to object that these transfers violate anyone’s rights.

 But...: If the most productive workers in a group are paid less than t he value of what they produce, why don’t rival employers just lure them all away? One answer is that these employees may care about ... their status... The high ranking they enjoy is more than enough to offset their sacrifice in pay. Similarly, their less productive co-workers may find it onerous to be at the bottom of the ladder, but they are compensated for that fact by their premium wages.

So, in effect, private markets are already applying an implicit progressive tax in the way they pay workers. And, in the process, they serve the interests of everyone in the hierarchy. The alternative would be costly social fragmentation.

Can anyone doubt that high rank has value, not just among groups of co-workers but also in society? ... [H]igh-ranking positions in the real world ... are possible only when others bear the costs associated with a low social ranking.

Tax systems that transfer income from rich to poor, thus ... reflect the costs and benefits of different rungs on the social ladder. They help make stable, diverse societies possible.

Enlightened libertarians believe that the best social institutions mimic the agreements people would have negotiated among themselves, if free exchange had been practical. Private pay patterns suggest that our current tax code meets that test.

Update: Kevin Grier emails a response.