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An Angry Letter to the Times, or, Keebleromics

October 11, 2010

Wednesday I’m off to NYC for vacation, but I wanted to squeeze in at least one post this week.  There was a fairly absurd article in the Times yesterday by an economist at Harvard who stated the Ayn Randian view that the more you tax the “producers” of the world, the less they’ll work.  Harvard Professor of Economics N. Gregory Mankiw lays out why it’s not worth it to him to write an article for $1,000 if the Bush tax cuts for the rich expire:

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

Mankiw then portends darkly that others may well also go on “strike”:

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.

I have a couple problems with this analysis. 

1.  The idea that highly skilled people will simply stop or reduce utilizing their skills because they’re going to pay more taxes.  Mankiw’s sole motivation for working at all, or at least the sole motivation he displays in the article, is money.  I don’t think Jonathan Franzen or Iron and Wine will skip creating a book or album as they think, “you know, the end of the Bush tax cuts for the rich just don’t make this worth my time.”  Or that people who have gone into the caring professions such as dentists or surgeons did so only for the casks of ducats to be gained.  At the highest levels of performance, as much as a surprise as this may be to some people, it’s the satisfaction in work well done that matters as much if not more than making more money.

As well as I can understand it, the abstract he links to about de-incentivizing the rich seems to point to a decreased likelihood that they will buy and sell stocks or make other capital investments:

For lower income groups, labor income accounts for most of their income. Since labor income tax is withheld, the only way to manipulate income is to work more, or less. For higher income groups, capital income is more important, and this is more readily manipulated for tax purposes through asset allocation decisions. The researchers show that taxpayers with itemized returns have particularly high elasticity.

The Bush tax cuts for the rich are primarily aimed not at the workers of the world, the artists and doctors, but at those who manipulate markets, manage hedge funds, and pay themselves contractually obligated bonuses as a reward for wrecking the economy. 

2.  An economist of all people should know that decisions about who should pay how much tax are not just about

whether and how much the government should redistribute income

It never ceases to amaze me that people seem to see taxes solely as a cudgel by which wealth is transferred from the rich to the poor, a viewpoint expressed more and more angrily each year even as what passed for a safety net in America gets smaller and weaker.  They don’t begrudge the several trillion dollars of wealth transfer from the taxpayers of today and tomorrow and the day after that to Halliburton and W’s other friends in “bidness” (Oh to have Molly Ivins alive today, what I wouldn’t give) in exchange for a false sense of security – think of our troops going without body armor and adequately shielded Humvees while billions in cash were somehow lost in the “fog of war.” But my god, give a poor person dental care and oh the racket they make.  The irony is that many of them would be perfectly happy with the US becoming a third or fourth world country, in which they end up paying more in taxes and personal security expenses to shelter themselves in guarded walled compounds from an unemployed, uneducated, malnourished, sickly underclass with nothing to lose.

Taxes pay for things called “infrastructure” and “civil society.”  I.E., roads, schools, sewers, streetlights.  Some people are indeed so taxophobic that they would gladly go back to the stone age rather than pay taxes to have decent roads, but most of us think otherwise.  Too many people subscribe to an economic philosophy that can only be called Keebleromics – the idea that roads and schools and sewers are baked at night while we sleep by magic elves in trees in the woods, with no need for any o’ dem durn taxes to make it happen.

I make what by any standard would be called a comfortable living.  I don’t like taxes in the abstract because of course I’d like to be spending that money selfishly on myself.  But I understand that without schools to create half-competent employees and reasonably decent citizens, without roads for commerce to take place on quickly and efficiently, without sewers to prevent us from returning to medieval levels of disease and death, I can’t enjoy the life I live now – that to enjoy that life, I have to pay taxes.  And I am willing to pay more if it meant having what European “socialist” countries have – health care, autobahns, bullet trains, buildings that don’t fall down in earthquakes.  (Irony to be explored another time – “private” health insurance makes me a lifetime permanent resident of Reno, Nevada; I am not free to grow professionally and take my skill set to another place because I would never get health insurance anywhere ever again, and aside from emergencies my current insurance is only good here.  So people like me are held back from growing the economy because we are feudal vassals to the current, non-“socialist” insurance system.) 

 

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One Comment leave one →
  1. elisapiper permalink
    October 11, 2010 10:28 am

    Brilliant!

    Keebleromics – I love it.

    Course, in Nevada, I think a lot of folks have a very romantic view that we’ll all be pulling ourselves up by our boot straps (whatever that means) and riding (not) wild horses when the roads crumble into dust around here.

    So many more things to say on this topic … but there’s an election on, and I’ve got to do my bit to make some noise.

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