[FoRK] Tax math

Lorin Rivers lrivers at mosasaur.com
Mon Oct 11 13:43:18 PDT 2010

I'm MUCH more worried about the accelerating accumulation of wealth by the top tiniest fraction of the population than I am by whether or not a professor is mostly or completely venal.

I honestly don't for a minute believe people do this sort of calculus when they decide if they are going to do stuff (or not).

I'm in the vanishing middle-class, and salary is way down on the list of what work I choose. And my tax bracket and the impact of what income I have on it is not even relevant.

On Oct 11, 2010, at 15:20 , laurent oget wrote:

> 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.
>> 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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Lorin Rivers
Mosasaur: Killer Technical Marketing <http://www.mosasaur.com>
<mailto:lrivers at mosasaur.com>
512/203.3198 (m)

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