[FoRK] Tax math

laurent oget laurent at oget.net
Mon Oct 11 13:20:13 PDT 2010


The fact that income tax rates on the high income were more than twice
higher than they are now, and yet economic activity did not grind to a halt
in the 50s and 60s is a hard counter-example to miss.I guess they do not
call economics the dismal science for nothing, as it appears being in
agreement with his political delusions is more important for Mankiw than any
relationship with reality.

Laurent




2010/10/11 Adam L Beberg <beberg at mithral.com>

> He has the math about right... the "why bother" factor is a lot more of an
> issue then people realize when it comes to pursuing income for the
> smart/rich set. The motivation to get up in the morning and go work for
> someone else is zero if you're wealthy.
>
> Easy enough to set your salary to $1/year, and not pay any taxes for years.
> About time to get on with starving the beast. A few thousand people do that
> and tax income drops like a rock. (see also, California)
>
> ----
>
> https://www.nytimes.com/2010/10/10/business/economy/10view.html
>
> October 9, 2010
> I Can Afford Higher Taxes. But They’ll Make Me Work Less.
> By N. GREGORY MANKIW
>
> AN important issue dividing the political parties is whether to raise taxes
> on those earning more than $250,000 a year. Democrats say these taxpayers
> can afford to chip in a bit more. Republicans say raising taxes on those who
> already face the highest marginal tax rates will hurt the economy.
>
> So I thought it might be useful to do a case study on one of these
> high-income taxpayers. Fortunately, I have one handy: me.
>
> As a professor at Harvard and the author of some popular textbooks, I am
> comfortably in the income range that would be hit by this tax increase. I
> have been thinking — narcissistically, to be sure — about how higher taxes
> would affect me. Maybe these thoughts can shed some light on some of the
> broader policy issues.
>
> First, I have to acknowledge that the Democrats are right about one thing:
> I can afford to pay more in taxes. My income is not in the same league as
> superstar actors and hedge fund managers, but I have been very lucky
> nonetheless. Unlike many other Americans, I don’t have trouble making ends
> meet.
>
> Indeed, I could go so far as to say I am almost completely sated. One
> reason is that I don’t aspire for much more than a typical
> upper-middle-class lifestyle. I don’t fly around on a private jet. I have
> little desire to own a yacht or a Ferrari. I own only one home, in which I
> have lived since 1987. Paying an extra few percent in taxes wouldn’t create
> a lot of hardship.
>
> Nonetheless, as Republicans emphasize, taxes influence the decisions I
> make. I am regularly offered opportunities to earn extra money. It could be
> by talking to a business group, consulting on a legal case, giving a guest
> lecture, teaching summer school or writing an article. I turn down most but
> accept a few.
>
> And I acknowledge that my motives in taking on extra work are partly
> mercenary. I don’t want to move to a bigger house or buy that Ferrari, but I
> hope to put some money aside for my three children. They will never lead
> lives of leisure, but I hope they won’t have to struggle to find down
> payments to buy their own homes or to send their kids to college.
>
> 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?
>
> By contrast, without the tax increases advocated by the Obama
> administration, the numbers would look quite different. I would face a lower
> income tax rate, a lower Medicare tax rate, and no deduction phaseout or
> estate tax. Taking that writing assignment would yield my kids about $2,000.
> I would have twice the incentive to keep working.
>
> Now you might not care if I supply less of my services to the marketplace —
> although, because you are reading this article, you are one of my customers.
> But I bet there are some high-income taxpayers whose services you enjoy.
>
> 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.
>
> Reasonable people can disagree about whether and how much the government
> should redistribute income. And, to be sure, the looming budget deficits
> require hard choices about spending and taxes. But don’t let anyone fool you
> into thinking that when the government taxes the rich, only the rich bear
> the burden.
>
> N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser
> to President George W. Bush.
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