Monday, October 11, 2010

Higher Taxes Make You Work Less, Because You Don't Like Money

Does anyone still believe this? Former GWB advisor Greg Mankiw has taken the time to compose an article reiterating the old line that taxes make people not want to work. And I took the time to read it. Call me a masochist.

Oh boy. Here we go.

You wanna read it first? Here it is. Knock yourself out.

There are a few completely dishonest calculations in the piece. And a few assumptions that rankle. But the basic concept is one that's always irked me. That is, "I'd rather have nothing than have something of which I have to give part away."

We've heard it before. Taxes are a disincentive to work. Really? I can see how people might not like paying their taxes. I can see how people may argue over how much is too much. (Is 30% too much? How about 50%?) But I cannot understand people saying that because any amount is taxed, they won't bother making any money because it just isn't worth it to them.

Mankiw begins by saying that he's doing just fine, thank you very much. But what should he do if someone asks him if he'd like to make a few bucks at a speaking engagement? Apparently the answer is to turn it down. Not because he doesn't need the money. (He doesn't. Remember?) But because he wouldn't be able to leave as much of it for his children as he would if there were no taxes of any kind. Not lower taxes, mind you. No taxes. Oh. Okay.

Here's his logic, such as it is.

"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."
That is simply the miracle of bullshit. Because the no-tax scenario does not exist, why are we talking about it?

But now we're not just talking about taxes here, it seems. He has now invested his money in a company that is doing very well and his $1000 has magically transformed, 30 years from now, into $10,000. Nice. But what's wrong with just having the $1000 you earned in the first place? Well, nothing. Unless your aim is to make the point that $1000 is really $10,000 and you need a benchmark with which to whip that original sum. So find a way to make it $10,000.

"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."

It must be true. It's calculus! Okay. Now we're down to $523 after taxes. But hold on. We're assuming the top marginal rate, and we're assuming the GWB cuts expire. (Should we really assume that?) And we're also assuming a tax rate (Medicare) that doesn't begin for another three years. Still, even so, you have $523 left, right? That's something. Oh, wait. More horrible horrible taxes that make making money just not worth it.

"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."
Okay, so now he's comparing a theoretical 8% return on an investment with only 5.2%, which is still pretty damn solid, particularly in today's economy. But now we're down from the completely untaxed and wisely invested $1000 becoming a nice fat $10,000 (in 30 years) to it being only $1700. A mere pittance. Oh, but he's giving it to his kids, right? I think we know where we're going next.

"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."

Ah, yes. The estate tax. Again, we're assuming the top rate here. Which doesn't yet exist. So, Mankiw's horrible horrible scenario comes down to working for $1000 and having his kids inherit $1000. In the absolute worst-case scenario. Which doesn't exist. I'm crying here. Hey, Greg. Tell your kids to get a job instead of waiting 30 years to get that lousy $1700.

"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?"

No. But not for the reasons he states. He doesn't work because he has enough money already. If he needed more, he'd take the assignment. If he didn't have any money at all, would he not take it? Would he rather have the $523 or $0? Has he never worked in his life? Because he's paid taxes at these rates already, presumably, if he has. But why? He says he has no incentive. And yet...he's worked. And continues to do so. This article's existence is proof.

Mankiw's argument seems to boil down to not wanting to pay any taxes. So apparently if someone said to Mankiw, "Hey, I'll give you 1000 bucks to do something" he'd say yes. But if they said, "Hey, I'll give you 2000 bucks but after tax it will end up being 1000 bucks" he'd say no. This makes absolutely no sense.

The equation shouldn't be "how much is going to the government". It should be "how much is going to me". If the answer to the last question is more than zero, then you have an incentive to work. If you don't, it's just spite.

Let's kick Mankiw out of this scenario and pop in an actual person, Joe Schmo. Joe isn't in the top tax bracket. Joe has rent to pay. And food to buy. Joe gets an offer of $1000 to write an article. Joe knows that he'll probably only take home about $750 of it. (Because he isn't in Mankiw's bracket.) So, Joe can a) take the job and have $750 towards paying his rent or b) not take the job because the taxes have taken away his incentive to work. Gee, what do you think he does? His incentive to work is paying his fucking rent.

And another thing: Joe isn't going to invest his money (which, contrary to what Mankiw says, could result in him ultimately getting nothing, if the company goes under). He's going to spend it. So the "miracle of compounding" never plays into it. And the evil estate tax is immaterial. Even if he did have $1000 to leave to his kids 30 years from now, unless he had another $1,999,000 to add to it, there would be no estate tax for his kids to worry about. None.

Mankiw's article is the most elitist piece of crap I've seen in the NYT, or any media outlet, in some time. And here's how he ends it.

"But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden."

So, if what he's saying is true and he won't take that writing job because he doesn't need the money and he's disincented anyway because of his tax burden, then guess who gets the job. It's Joe Schmo! So Mankiw's last statement is, by his own logic, false. Because Joe now has $750 that he wouldn't have had if we didn't tax Greg Mankiw. Who is a schmuck.


Kizz said...

Didn't some other arrogant internet-ignorant lawyer just wade into this fetid pool and get his ass kicked so roundly he departed his blog with all due haste?

Exactly why are we supposed to be sad that he's not taking on extra work? Does his writing provide something we cannot live without? He's got plenty of money, he's contributing to society, he's not depriving us of some essential service or product so why do I give a fuck whether he takes the job or spends that extra time with his family. Or his golf game. Or his dick.

However, if he does actually know of a company that will take an investment of only $1,000 and give me a guaranteed 8% return for 30 straight years I'd love for him to pass on the number of Investor Relations.

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