Taxing The Rich Doesn't Just Affect The Rich
Harvard prof and textbook author N. Gregory Mankiw writes for The New York Times about the talk of raising taxes on those earning more than $250,000 a year. Dems say these taxpayers can afford to fork over a bit more; Republicans say raising taxes for this set will hurt the economy. Mankiw uses himself as a case-study, noting that paying more taxes wouldn't cause him day-to-day hardship, but...
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?
Without the tax increased advocated by the Obama administration, the writing assigment would end up yielding his kids about $2K -- giving him twice the incentive to keep working. And the same goes for a lot of people -- actors, actresses, your orthodontist. Mankiw contends that as their tax rates increase, their services will be in shorter supply.
How long till one of our typically short-sighted lefties says he's wrong because people will always take the money now?
Not all of us see only the present balance in the account.
brian at October 11, 2010 5:00 AM
...If it weren't for apathy, none of this would be possible.
Robert at October 11, 2010 6:10 AM
The Lefty argument I usually hear is that government is a good deal for our money, far beyond the present value of $10,000 thirty years in the future for $1000 invested today. We get lots and lots of good services and products from our overmasters in the public sphere. In fact, we should pay even more in taxes and get even more good services.
I've heard Barack's father (the one of Dreams From My Father) wrote a paper arguing that tax rates should be 100%.
doombuggy at October 11, 2010 7:49 AM
It is not just at the 250k income level that these financial calculations kick in. There are people who might chose to limit their income to the 15% federal bracket in order to keep from jumping to 23 percent on any additional money. A lot of people with elderly parents may chose not to work and instead take care of an aging parent at home rather than putting 6k or more towards the cost of a nursing home. Many people are actually going backwards in their retirement planning because they don't realize that the marginal tax rates they are paying on their additional income doesn't even come close to making up for what they now have to pay other people to do for them, and also grants and scholarships that their college age children are now ineligible for because of their parents tax bracket.
Isabel1130 at October 11, 2010 9:05 AM
Once again, let's sing Kumbayai, and have a group hug and cry for the rich.
Mankiw turns down most work. Oh, boo-hoo.
Oddly, I make less than $250k (net) a year, and I think I have never turned a work in my life.
I need to feel sorrier for myself, obviously. I need to stop working--that's right, it those taxes that did it. I need to calculate how much my great-grandchildren are missing out as I could not save enough for them.
BOTU at October 11, 2010 10:32 AM
It's just like people who believe you can isolate and "punish" certain entities with zoning or environmental laws. So many idiots here have thought they were punishing the "big developers", then they go try to put an addition onto their little house and find the paperwork and fees are astronomical, if they're even allowed at all. Well, they voted for it.
Penalizing the "rich" will only cost jobs. It would be like the film industry getting all upset that such and such actor gets paid millions. Yeah, it's unfair in a way, but people pay to see him. That's the market of supply and demand. It's not meant to treat everyone equally.
My girlfriend is working on the "Twilight" movie right now. There are kids half her age getting paid a thousand times more than her, but is she going to try to penalize them or the studios? They'd just make fewer movies, and that would be cutting off her nose to spite her face. The fact they're getting rich means she has a job. The more they have to pay in taxes, the fewer jobs they'll create.
Class jealousy is exploited by our politicians, and fools fall for it every time, but the little guy is usually the one who pays the most, even as he votes in his own demise.
lovelysoul at October 11, 2010 11:35 AM
we can always count on butthole's insight. Butthole, I am indeed a fairly hi paid IT consultant, and I quit working more than 40 hours a week because I noticed my take home between 40 and 50 hours a week did not change much, it wasn't worth the 10 hours lost. Perhaps if you had a brain you might understand that people do indeed turn down work in the real world because of higher bracketing
ron at October 11, 2010 12:49 PM
Ron-
You are a little sniveling sissy, and obviously lack ambition enough to better your position in life.
I work 50 hours a week in an off-week. If I net 100k in a year, I think I am lucky (I have a weakness for buying woodworking equipment I don't need, and maybe that cuts down my net).
Form a chapter of "Pussies-R-Us," and join the Ladies Auxiliary to the Tea Party. You have a lot of extra time.
Good luck.
BOTU at October 11, 2010 1:11 PM
"I've heard Barack's father (the one of Dreams From My Father) wrote a paper arguing that tax rates should be 100%."
Considering Obama Sr. was an African-Muslim, I am sure slavery would be on his short list of potential economic solutions.
Feebie at October 11, 2010 1:48 PM
Even if you increase taxes on the rich, there are not enough rich people for the tax increase to make a significant increase in revenue.
Nick at October 11, 2010 2:36 PM
You'll have to excuse BOTU, he's a drooling idiot.
I could clear 150k-200k per year if I wanted to work enough to do it. But at that point, I end up losing so much in taxes that I'd rather take the time off and go golf than give any more to the government.
You can call it cutting off my nose to spite my face. I call it "I don't live to work, I work to live" and after I've met my basic needs and bought my toys, I don't need to work any more. There's no point to saving because it's just going to be inflated away.
brian at October 11, 2010 2:41 PM
BOTU you are a moron.
How much is your time worth to you? If 40 hours a week ends up netting you 240k after taxes, that is plenty right there. Now suppose someone decides to work harder to better their position...well if the extra labor, lets say an extra 20 hours, earns 30 more per year, initially that sounds like a good thing...until you account for the higher tax bracket that it puts one into as a result. The increase in tax burden means that essentially this person is subjecting themselves to a pay CUT, by making more money. Why would anyone in their right mind work more hours for less money? That is incredibly stupid.
Now, if your extra hours do NOT bump you up a bracket, then obviously yes you do have some benefit to it, but only idiots work more for less. Even if it didn't result in an effective pay cut, it is a cut in the value of those hours worked. Why go from working for essentially 100 an hour, to 50 an hour or less?
Robert at October 11, 2010 4:57 PM
butthole, I am far from a pussy, but go ahead and say that while you masturbate at home if it makes you feel good. I am one of those suckers they want to milk because I make more than 250k. I personally think all tax brackets should go away and we all pay the same percentage on every dime we make, no deductions, no credits, no minimum. If I make more I automatically pay more than some slob who makes a measely 100k. That is the only fair tax, but the lefties cannot have a fair tax because it plays against their crack whore constituents who only want government handouts. God I hate liberals and idealists, they leave their brains in the bassinet at birth.
ron at October 11, 2010 5:45 PM
Brian-
You can invest in TIPS bonds if you think your savings will be inflated away. Some say gold, but I think all gold is fool's go9ld at this point.
Real estate is another bulwark against inflation, and the government will help you buy through the tax code.
There are plenty of ways to retire in 10 year, if you are netting $150k annually.
I work like a dog as I do not net that much in most years. Also, projects take on a life of their own, and it is about hitting a deadline and promise made to clients, not the money.
I still have never turned down work in my life.
Anyone who turns down work due to wrinkles in the tax code is a pussy. Jeez, tell me about the tax code--everything I do is tax deductible, from cars, to phones, to insurance, even travel (it's on behalf of business or clients, right?). Yes, you have to fudge a bit on taxes, but anyone who runs a small business basically expenses everything.
No waa-waa from me--though I think federal outlays hould be cut to 16 percent of GDP, starting with heavy whacks at Defense, USDA, HUD and Commerce.
BOTU at October 11, 2010 5:46 PM
ron and others, BOTU is our resident borderline. He loves to hear the sound of his own voice, and if you get him started, he will engage in massive sock-puppetry to "prove" his point -- he's done it here before. To avoid the resulting clogging of the comments section, we ignore him.
LS, it is interesting how leftist types are always babbling about the "interconnectedness of all things" -- until they decide to target someone with taxes and regulations. Then, suddenly it becomes "Don't worry, this won't have any effect on anyone else!"
Cousin Dave at October 11, 2010 6:14 PM
BOTU appears to be the "troll" for this blog.
Reagan once said that he started to make the switch from Democrat to Republican when his accountant told him that if he only made 2 movies the next year, he'd make more money (because of taxes) than if he made 3. At that point, he realized something was wrong with the system.
KrisL at October 11, 2010 6:31 PM
Makiw makes a valid point: that marginal income tax rates do affect productivity at a certain level. This is the same point illustrated by Laffer's famous cocktail napkin illustration. Where I'm not certain he is correct is his claim that returning marginal tax rates to their Clinton-era levels (which were still low, by post-war U.S. standards) would have a negative effect on the broad economy.
If you're a very well-paid, tenured Harvard professor, much of whose salary comes from tax-privileged donations to an elite university and who doesn't need anything, perhaps you don't write that $1000 article; but this doesn't mean that someone equally talented who is a bit hungrier doesn't write that article just as well, if not better. After all, he needs it; the tenured professor's income is very bit as secure even if he produces mediocre content.
Further, Mankiw's argument assumes that we are on the right, rather than the left, side of the Laffer curve; that is, that the reduction or maintenance of marginal income rates still has much to yield in terms of productivity. However, the facts suggest otherwise: since the passage of the present tax rates, real income of the middle and lower classes has stagnated, not grown. I've seen little evidence for the correctness of the theory that low tax rates improve the welfare of the upper and middle classes in concert.
Finally, and I think most importantly: our country is currently running a massive deficit as a result of recession, massive growth of Social Security and Medicare spending, and two lengthy and costly wars; we must start to close the gap between revenues and spending, and all of the clamoring about earmarks and other minor issues while neglecting the aforementioned entitlement and defense spending is much ado about (next to) nothing.
Mankiw's argument entirely neglects the need to finance our government's commitments. I'm in favor of low taxes, but our country's solvency is more important, and that is an issue that is nowhere to be found in his piece. If he wants to make a viable case for means-testing Social Security and Medicare or reducing military spending, all of which I favor, I'm all ears. But if all he wants to do from his sinecure is complain about taxes, I'm not interested.
Christopher at October 11, 2010 11:00 PM
If you want to protect yourself from taxes, read the book: Inc. Yourself
I highly recommend it.
----------------
I will agree that solvency is more important than low taxes. But solvency can only come through providing incentives for production of profitable labor. And that means lower taxes.
It also means dramatically cutting the cost of government. That means we will have to start phasing out expensive programs that benefit only niche groups, such as the elderly.
There is no justification for taking the income of the young to transfer it to the old. In theory it would be perpetuated continuously by the new young giving their income to the new old...but it relies upon unpredictable demographics, consistently low average ages at death (i.e. collecting benefits for only a few years as opposed to a few decades) and high levels of employment with sustainable growing wages for the bulk of the young working population, in order to maintain the system. As we've seen, these are trends that are not changing in a way that will allow the system to maintain itself as it is. We can start to phase it out now, when its fairly easy, or later, when it is brutally hard.
The choice is yours America.
Robert at October 12, 2010 5:31 AM
BOTU, by the way, "pussy" when used as an insult, usually refers to someone refusing to act out of cowardice or fear. I think what you're accusing people of though, if I understand your tone properly, is laziness.
I'm all for hard work when it is necessary, but it isn't laziness to refuse to work more for less and less of a return. Time is precious, and it is important to maximize its value, not only in terms of your dollars earned, but in terms of your life lived. Hours not wasted giving yourself a paycut could be better spent on other things, anything from charity to self improvement to simple quality time with family or friends. Those things count too.
Robert at October 12, 2010 5:36 AM
The thing is, the higher the taxes, the more energy and productivity that goes into hiding income, finding shelters, taking business overseas, etc.
If we had a fair flat tax, the rich would happily pay their share, and the government would probably end up collecting more money. Plus, most people wouldn't have to even file taxes, since it would be paid by the companies employing them. The simplified tax rules would allow us to dismantle most of the IRS and save that expense.
I have 4 small corporations, and I pay my accountant $2500 each year just to prepare my taxes - find all the loopholes and deductions he can, etc. That's, of course, on top of the taxes I pay. It's wasteful and costly. And just the time I spend working on that, rather than on my business, lowers my productivity. Imagine how much worse it is for larger companies.
Cut goverment spending and simplify the tax code with a flat tax and you'll see growth in this economy.
V
lovelysoul at October 12, 2010 6:34 AM
Not sure why the "V". Ooops.
lovelysoul at October 12, 2010 6:36 AM
"Yes, you have to fudge a bit on taxes, but anyone who runs a small business basically expenses everything. "
So in summary. I cheat like crazy on my taxes but the rich fuckers should pay more? Huh, progressive hypocrisy at it's best. And why is it that you have every right to take all these deduction but those who were effective enough to blow past you in income should not?
vlad at October 12, 2010 8:32 AM
So, according to this guy, people at higher tax brackets typically choose whether or not to engage in work by analyzing how much money this will net in 30 years? Must be nice not to actually need that $1,000 now, and to have the confidence that you personally won't ever need it...
But before you conclude that allowing the tax cut to expire is a completely bad idea, tell me - what DO you want to cut instead? If we should fight to keep the tax cuts, where else in the budget should that money come from?
It's not acceptable that the Republican Party seems to think that we can spend forever on subsidies to corporations, bailouts of industries, invasions of foreign countries, and "rebuilding" the foreign countries we've invaded but that we can't afford to spend anything on our own infrastructure or our health care, and that we can't raise taxes to actually pay for any of it.
jen at October 12, 2010 1:26 PM
Christopher: How much of the nation's GDP should the government take each year? I ask because when people say "more is needed", it is incumbent upon them to say how much more, I think.
I never get a response to that direct question, by the way. I have yet to have someone say "oh, x% is enough."
The follow up question would be: how much of that percent of GDP should come from each of the income quintiles? But as I said, no one every answers the first part.
Spartee at October 12, 2010 2:24 PM
Spartee-
In my commentary, I suggested federal outlays be limited to 16 percent of GDP. This could be accomplished by cutting military outlays by 60 percent, whacking HUD, whacking Commerce, whacking the USDA, and whacking the VA, and putting patients into the general population under Medicare.
BOTU at October 12, 2010 4:08 PM
@BOTU - has nothing to do with being afraid or anything.
But there are plenty of things I'd rather do with my life than work. And if working more isn't going to significantly improve my lifestyle, then fuck it.
A bad day of golf is still better than a good day of work.
brian at October 12, 2010 5:29 PM
Spartee:
I'm not willing to say that a particular proportion of GDP as taxes makes sense. It depends upon what our obligations are. I think that our intakes and expenses should be roughly in balance. Currently, those are two wars, the promises of Social Security and Medicare, and some other expenditures that are cheap by comparison. Add these to recession-related losses and we're facing potentially damaging deficits. We're also burdened by two wars that have been funded exclusively by bond sales for the last ten years or so. This has to stop. We have to start paying for the obligations our government has made.
Unless someone has a politically feasible plan to reduce expenses in a meaningful way – I follow these things closely, and no one with any clout does – then the only way to pay our bills is through higher taxes.
I support allowing all of of the Bush taxes expiring, not just those on people earning over 250k. We had balanced budgets during the late years of the Clinton administration, and no one was talking about going Galt then. Unless I missed something.
Christopher at October 12, 2010 11:57 PM
First of all, if you look at the facts, there was no balanced budgets nor surplus during the Clinton Presidency. The fact of the matter is that the more you tax people, the less they will work to avoid paying higher taxes! That is just common sense. If working additional hours places me in a higher tax bracket to make a little extra money, I wouldn't do it! In effect it WOULD cause me to make LESS money! That is insane!
Most small businesses fall into the "over $250,000.00 bracket and it is going to cause additional job losses at worse, at best, these businesses simply won't hire additional staff. With Obamacare on the horizon, huge government spending and deficits, additional regulations (including the 1099 fiasco)and new taxes, I predict massive layoffs and severe economic stagnation if not a major economic catastrophe.
The feds have got to stop spending money as if it was toilet paper, because it soon will be!
Dragonslayer666 at October 13, 2010 2:20 AM
I am in favor of some deductions on our taxes. Children are a long term benefit, an investment in our nation's future, so a tax deduction there, I support. Medical treatment should also have a tax deduction. Savings and investments should be tax deferred, taxing only what is taken out, and then at a reduced rate, thus encouraging people to conduct activities that support themselves long term, and support the expansion of businesses which employ more people as a result. Beyond that, I can't think of any other deductions off hand that I would support.
Robert at October 13, 2010 6:34 AM
"The first United States income tax was imposed in July 1861, at 3% of all incomes over 800 dollars in order to help pay for the war effort in the American Civil War.
In 1868, Congress again focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872. It had a short-lived revival in 1894 and 1895. In the latter year, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.
In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system."
This country survived for a long time without income tax, and even when it was passed, there was talk of capping it at 10% but that got laughed out of the gallery because no one could imagine it ever reaching such an absurdly high amount.
Since 1913, all we have seen is growth in entitlement programs. Not safety nets, as some, like social security, were meant to be, but cradle to grave government assistance, which has crippled our productivity as a nation.
lovelysoul at October 13, 2010 7:05 AM
"Distrust everyone in whom the impulse to punish is powerful!" Nietzsche said this. He might not have meant it in a financial sense, but it applies nonetheless.
Robert at October 13, 2010 10:33 AM
As I mentioned above, I agree that there is a level at which taxation does discourage productivity. I just don't think we're near that level. History seems to back me up on this:
http://www.tnr.com/blog/jonathan-chait/78304/pat-toomeys-epistemic-closure
Christopher at October 13, 2010 10:48 AM
Clinton had the benefit of the dot com boom, Bush had the drawback of its bust.
I'm reminded of a dilbert strip which goes like this:
Pointy Haired Boss: We're instituting a family friendly policy because current data shows that family friendly companies are more profitable.
Dilbert: Is that a contributing factor, or do the companies current profits simply disguise the true cost of their family friendly policies?
Pointy Haired Boss: We'll take a moment to allow the parents in the room to slap you now....
Robert at October 13, 2010 11:52 AM
Exactly what Robert said. Dot.com boom and dot. com bust. I was in the yacht chartering business during the Clinton years and had clients who sold their 3 or 4 year old dot.com businesses for fortunes (and took lavish yacht vacations to celebrate). But those dried up because it was all a bubble...the first of several.
lovelysoul at October 13, 2010 12:09 PM
Christopher, you can't trust TNR, they're mad.
To elaborate on what Robert and lovely said:
When Clinton left office, there was no surplus. The surplus was a trick of the light, gotten by double-counting some revenues, and using predicted revenues from the dot com sector continuing it's growth patterns. Obviously when the dot com bubble burst in 2000-2001, those predicted revenues were never going to show up.
Compounding that was the little incident on 9/11/01, which threw the economy into turmoil. Bush's tax cuts are the only thing that prevented a massive recession in the aftermath of 9/11.
brian at October 13, 2010 2:44 PM
Brian, do you have any good sources for that? Clinton has become so universally credited with creating a surplus, I'd love to prove this is a myth. I knew his policies didn't create the surplus, but I didn't realize there was actually no surplus.
lovelysoul at October 13, 2010 3:00 PM
Clinton had the dot com bubble; Bush had the real estate bubble. That's not really my point.
My point is that the relationship between marginal tax rates and productivity is not a simple, linear one, as suggested by supply-siders; we are not on presently on the right side of the Laffer Curve. We are on the left.
We can't afford to pay our bills in the long term at our current tax rates. Further, neither party has the political will to cut the largest portions of our government's expenses. The sane thing for someone who values fiscal discipline is not to extend the tax cuts. We have too much evidence that the "tax cuts now, spending cuts later" approach just increases deficits.
Christopher at October 13, 2010 9:14 PM
I knew several UPS/GM/Bethlehem Steel employees. They had charts hung in their lockers that showed them at what point working X numbers of overtime would actually bring home less income than if they quit at 51 vs 52+ hours.
That is the example of the Laffer Curve. And it is still happening today.
And that doesn't even cover people who work two separate jobs. At one point I was pulling 40 hours a week at a day job and doing a second at about 30 hours evenings and weekends.
My tax bill f--ked that -- I didn't get OT and I was paying double on everything.
As far as limiting government spending -- show me where in the constitution that Social Security, Medicare, the EPA, BATF, IRS, Dept of Ed, Dept of Energy, the FCC, the NTSB/DOT, Dept of Interior, the FDA and the rest of the alphabet soup (as they exist now) are legally constituted?
Even the FBI and the DOJ are questionable.
I will agree that some of these agencies need to exist -- the EPA should exist but in the form that they can stop the dumping of major pollutants in the Mississippi while all the interested parties can then go to court to get a permanent resolution for the damage. But not crap and tax carbon dioxide crap they are trying.
Jim P. at October 13, 2010 10:06 PM
Clinton had a surplus IF you include the Social Security money collected from the taxpayers.
But that money is NOT supposed to be counted as revenue, since it is, in theory, only supposed to be used to pay out to those who are recieving it.
Robert at October 14, 2010 1:54 AM
@Robert - don't forget, they counted 10 years worth of SS income as "general revenue" to come up with the projected surplus.
@Christopher - actually, all evidence suggests that we are quite far to the right side of the Laffer curve.
Duh. x + 1 - 2 is ALWAYS less than x.
We only ever get this situation when we compromise with Democrats. That's what happened to Reagan - he got his tax cuts, but only by allowing the Democrats to raise spending. Which completely fucked him, because they didn't specify limits to the spending and went on a cocaine-fueled binge at Tiffany's.
The obvious answer is to cut spending $2 for every $1 in tax cuts. But no government program ever shrinks. Government can never do with less. Doing with less is for the peons.
brian at October 14, 2010 8:09 AM
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