The Great Merit Debate: OK, OK…mea culpa re the ambiguity of “merit.” I’m not trying to be elusive. I’m just trying to find words that work for lots of different readers from different walks of like.

Let me be, I hope, totally clear: for Brad, Alan, and any other economist, merit=marginal product. Thus, principle one is very simply arguing that while a central tenet of economics is that your income is equal to the marginal value you add to the economy, reality is otherwise. Your bargaining power—your ability to claim more than your marginal product or get stuck with less—is an ever-increasing determinant of economic outcomes.

The litany of “I see this here and there in today’s economy” in the earlier post responding to Alan was supposed to provide a bunch of examples, ones I don’t think Alan has addressed, but let me be more precise and try to draw Brad deeper into this too.

Over the 1990s business cycle, 1989-2000, the real wages of low-wage workers (I’ll use the 20th percentile) grew 12%, or 1% per year. In the 2000s cycle, 2000-07, they grew 1% in total. It took one year in the 1990s cycle for low-wage workers to earn what they did over the full 2000s cycle!

Something was obviously very different for these workers in the 2000s, and I don’t believe it was their marginal product or skills. In fact, the 1990s gains occurred exclusively in the latter 1990s and early 2000s, when full employment labor markets were boosting the bargaining power of even the least skilled workers (the 1996 minimum wage increase helped too). In the 2000s cycle, labor markets never tightened back up much, and those whose ability to bargain depends less on the tautness of the job market—those at the highest reaches of the income scale—claimed most of the growth for themselves.

Tax Incentives: Alan very usefully adds some empirical meat to the argument about tax incentives, suggesting that an increase in top marginal income tax rates as Clinton and Obama are suggesting (allowing the top rate to reset from 35% to 39.6%) could “lower taxable income by 3 to 4 percent.”

That is not a trivial effect, but I’d like to push Alan to take it further. Whose income are we talking about? Not everyone’s, right? And what might be the impact on jobs and incomes of most workers? And what factors offset this effect in the Clinton years, when taxable income and gov’t revenues went up even as marginal rates were raised at the top?

Also, through what mechanism does this occur? IE, I note you’re citing “taxable” income changes. Does that mean income doesn’t change as much (e.g., we’re not talking labor supply effects), but the part of income that gets taxed does change? If so, that suggests more shifting of income between categories than the incentive effects I’m talking and arguing about: labor supply and investment.

Finally, I need to look more closely at the Gruber-Saez paper, but Jason Furman tells me that the paper is about optimal tax rates and it argues the tax code should be much more progressive than it is today, which seems like a conspicuous omission from your post, wherein you seem to be advocating a less progressive code.