Higher Middle Class Taxes

Looks like the Obama Administration is testing the waters on the idea of raising taxes on the middle class,

WASHINGTON (AP) — President Barack Obama’s treasury secretary said Sunday he cannot rule out higher taxes to help tame an exploding budget deficit, and his chief economic adviser would not dismiss raising them on middle-class Americans as part of a health care overhaul.

[…]

Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers both sidestepped questions on Obama’s intentions about taxes. Geithner said the White House was not ready to rule out a tax hike to lower the federal deficit; Summers said Obama’s proposed health care overhaul needs funding from somewhere.

“There is a lot that can happen over time,” Summers said, adding that the administration believes “it is never a good idea to absolutely rule things out, no matter what.”

Of course, raising taxes would mean that President Obama not going to keep his promise of not raising taxes on the middle class. This shouldn’t come as a big shock as he has already raised the cigarette tax, which means higher taxes on people in the middle class. Also, President Obama has gone back on his promise not to raise taxes on those making over $250,000 above the Clinton era tax levels.

“If we want an economy that’s going to grow in the future, people have to understand we have to bring those deficits down. And it’s going to be difficult, hard for us to do. And the path to that is through health care reform,” Geithner said. “We’re not at the point yet where we’re going to make a judgment about what it’s going to take.”

Well sort of. This is really actually political spin. One reason why higher deficits today can mean lower growth in the future is that there may very well be higher taxes in the future. Of course, there is also the interest rate issue as well and crowding out. These also reduce growth. And lets be clear, the reason why it is going to be hard is because President Obama and his Administration have run up the deficit quite a bit. They have spent lots of money and have promised to spend quite a bit more as well.

Update: Commenter Sam points to this press conference with Robert Gibbs denying that there is some possibility of a tax increase on the middle class.

WASHINGTON – The White House spokesman says President Barack Obama is committed to not raising taxes on U.S. families earning less than $250,000.

Robert Gibbs restated that assurance Monday after two top White House officials suggested over the weekend that they could not rule out tax increases as the administration struggles to cut the budget deficit in half in the coming years.

Well of course unless you’re a smoker, but then you’re icky anyways.

Commenter Rick Almeida asks,

Did Obama really promise not to raise taxes on those making over $250,000, beyond letting the Bush-era tax cuts expire?

Yes.

Sen. Obama believes that responsible candidates must put forward specific ideas of how they would pay for their proposals. That is why he would repeal a portion of the tax cuts passed in the last eight years for families making over $250,000. But to be clear: He would leave their tax rates at or below where they were in the 1990s.

– The top two income-tax brackets would return to their 1990s levels of 36% and 39.6% (including the exemption and deduction phase-outs). All other brackets would remain as they are today.

This was written by Jason Furman and Austan Goolsbee, both were working for the Obama campaign. It is clear that this was something approved of by then Candidate Obama.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. sam says:

    It’s been denied

    Gibbs: No tax hike for middle class, knocks down remarks by administration officials

    Associated Press

    Last update: August 3, 2009 – 12:41 PM

    WASHINGTON – The White House spokesman says President Barack Obama is committed to not raising taxes on U.S. families earning less than $250,000.

    Robert Gibbs restated that assurance Monday after two top White House officials suggested over the weekend that they could not rule out tax increases as the administration struggles to cut the budget deficit in half in the coming years.

  2. PD Shaw says:

    Just from the clips of Geithner I’ve seen, my prediction is that Obama is going to push for a tax on gold-plated healthcare insurance. And Geithner knows that such plans are required to be available to all corporate employees, not just the guys on the gold-plated floor with gold-plated toilets.

  3. sam says:

    And Geithner knows that such plans are required to be available to all corporate employees

    But do all corporate employees take them? I’d bet not, especially younger, unmarried employees. Moreover, it would really depend on how gold-plated the policy is, that is, there’d have be some threshhold cost floor, right? Anyone seen any speculation as to what the cost floor would be? (I haven’t found any discussions of it.)

  4. Rick Almeida says:

    Of course, raising taxes would mean that President Obama not going to keep his promise of not raising taxes on the middle class. This shouldn’t come as a big shock as he has already raised the cigarette tax, which means higher taxes on people in the middle class. Also, President Obama has gone back on his promise not to raise taxes on those making over $250,000 above the Clinton era tax levels.

    Two quibbles:

    – Isn’t raising the cigarette tax really a tax increase on the working, not middle, class?

    – Did Obama really promise not to raise taxes on those making over $250,000, beyond letting the Bush-era tax cuts expire?

  5. just me says:

    Just from the clips of Geithner I’ve seen, my prediction is that Obama is going to push for a tax on gold-plated healthcare insurance

    I am curious just how they would define “gold plated.” Is it cost, amount of coverage, how much the employee pays in premium vs employer, some other factor, or will it be based on the size of the company.

    I think in the end they are going to raise taxes on the middle class-there is no way to pay for what they have passed much less including a healthcare plan in the deal. My guess is that it will be some kind of back door tax rather than outright income taxes so when Obama gets raked over the coals over going back on his promise he can say he only meant income taxes.

  6. PD Shaw says:

    Here’s some decent discussion of taxing insurance plans valued between $17,000 and $25,000 per year:

    According to the Kaiser Family Foundation, the average family pays approximately $13,000 for health coverage; 9 percent “of workers have family coverage with premiums of $17,000 or more” and “less than one percent have coverage with premiums of $25,000 or more.” Axelrod suggests that the new tax would target “executives at Goldman Sachs,” but a closer examination suggests that other Americans, those with less generous packages, may also pay a price.

    While some plans are certainly too generous, others cost more because they insure a sicker workforce, workers in dangerous occupations or higher cost areas. As Merrill Goozner explains, “the only thing ‘Cadillac’ in the health insurance costs of that GM worker is the nameplate of the car rolling off the assembly line. His higher premiums are a direct function of he and his co-workers’ higher claims, not more generous benefits.”

    Wonk Room

    I think it would be difficult for Obama to support a raise in the income tax levels below $250k, but this is the kind of policy that might not be considered a tax increase by everybody.

  7. Mr Evilwrench says:

    WASHINGTON (AP) — President Barack Obama’s treasury secretary said Sunday he cannot rule out higher taxes to help tame an exploding budget deficit, and his chief economic adviser would not dismiss raising them on middle-class Americans as part of a health care overhaul.

    Would that be the budget deficit these nitwits intentionally exploded with the porkulus bill? That’s an interesting way to keep one’s promises. Now, why is it necessary to add this to healthcare of all things? Although, anything like this they can kluge onto that thing will doom it even further.

  8. Steve Verdon says:

    Thanks Sam, post updated. Rick, see the update as well, yes he made it part of his campaign platform.

  9. Michael says:

    This shouldn’t come as a big shock as he has already raised the cigarette tax, which means higher taxes on people in the middle class.

    No, that means higher taxes on smokers. The two categories may overlap, but they are not the same.

    The White House spokesman says President Barack Obama is committed to not raising taxes on U.S. families earning less than $250,000.

    That’s not exactly a denial. Once can simultaneously be committed to not doing something, yet leaving the option available should it become necessary.

  10. An Interested Party says:

    I’m just curious…putting aside the promises that the president made on the campaign trial (yes, I get it he would be going back on his word if he raises taxes on the middle class) and also putting aside what his administration and Congress have already spent on his watch (yes, I also get it that is a lot of borrowed money)…it isn’t Bush bashing to note that the president inherited a huge deficit from his predecessor…now, how would anyone propose that he balance the budget? Since most of the money is spent on the military, Social Security, Medicare, and Medicaid, what should be cut so that tax increases aren’t necessary…

  11. Michael says:

    Since most of the money is spent on the military, Social Security, Medicare, and Medicaid, what should be cut so that tax increases aren’t necessary.

    I think there’s several hundred billion dollars being spent that are not part of any of those programs.

  12. Steve Verdon says:

    Michael,

    No, that means higher taxes on smokers. The two categories may overlap, but they are not the same.

    Which is why it is going back on his word. There was no “smokers exception clause”, but good effort.

    AIP,

    …it isn’t Bush bashing to note that the president inherited a huge deficit from his predecessor…now, how would anyone propose that he balance the budget?

    How about by not spending huge amounts of money, or promising too? If you, as an individual, are faced with a reduction in your income (tax receipts) do you then go out and buy a new car (health care reform for example) thus increasing your monthly expenditures well beyond what is sustainable?

    Since most of the money is spent on the military, Social Security, Medicare, and Medicaid, what should be cut so that tax increases aren’t necessary…

    This is why the health care reform legislation, to date, has been nothing but failure. It doesn’t reduce the growth rate of costs, doesn’t reduce costs, if anything it increases the federal governments commitment and hence its liabilities.

  13. sam says:

    @PD

    I think it would be difficult for Obama to support a raise in the income tax levels below $250,000, but this is the kind of policy that might not be considered a tax increase by everybody.

    PD, when I follow the link you provided, I find this:

    Over the last several days, White House officials publicly embraced a plan to tax “gold plated, Cadillac” insurance plans valued somewhere between $17,000 and $25,000 a year.

    The proposal would levy a tax on the employer and the insurance company offering the coverage [my emphasis] in an effort to raise some new revenues for health care reform and “dissuade sales of plans with overly generous benefits.

    Evidently the pondered tax would not fall on the individual policy-holder, but on the employer and the insurance company.

  14. Rick Almeida says:

    Thanks for the link, Steve.

  15. PD Shaw says:

    sam, you point to an additional issue for Obama, which is that he mercilessly ridiculed McCain’s plan to tax healthcare benefits. But as I see it, taxing the insurance company would simply result in the insurance company passing the tas onto its consumers, whether they be rich or poor, or in greatest need.

    I support taxing employer healthcare insurance benefits as income BTW. I think the left understands that not doing so creates inequities and is an untapped source of revenue. But the linked article does a good job showing how difficult (maybe impossible) it would be to eliminate the tax on the “bad” people, leaving only the “good.”

  16. PD Shaw says:

    Um, I misspoke. Crock meant:

    tax bad people
    no tax good people

    Or crock gets angry.

  17. Steve, are you aware of any analysis on what this is going to do to small businesses? The impression I have is that this is going to be done on our backs as much as on the backs of those making $250K a year. Do they really think that small businesses have such great margins that they can afford to lose another 8-15% for these kinds of mandates? The Obama Administration and their shills may claim that they aren’t trying to drive private insurers out of business, but if I am forced to pay a “fine” to help pay for the government provided health care insurance even if I am already providing a better health care plan, then the private insurance we provide today is going to go away in a heartbeat.

    Of course, my job is made harder given their policy actions that have caused numerous sources of funding to dry up, but I digress. I swear, sometimes I really wonder if they want us to succeed.

  18. I don’t understand how a Kenyan can raise our taxes.

  19. Jim says:

    Call me cynical but President Obama will be mortified when Congress is unable to extend President Bush’s tax cut past 2010. He will show is true compassion throwing Congress under the bus as he laughs his way to the bank so to speak.

  20. Steve Verdon says:

    Charles,

    No, sorry.

  21. Michael says:

    Which is why it is going back on his word. There was no “smokers exception clause”, but good effort.

    Hardly. If I said I won’t discriminate against black people, and I discount a black candidate because he doesn’t have the requisite skills, does that mean I’m going back on my promise?

    You’re playing word-games Steve, and I don’t understand why given the number of legitimate criticisms you have against Obama.

  22. Joe Camel says:

    My wife and I have already notified our employees that when the taxes go up and we are forced to provide all the required items that will come of this; well, they too will join the list of those unemployed. Every time I turn around the ceiling on SS is increased so I no longer max out. When the Bush tax cuts are gone, we will cut one employee right up front, and she has been notified. She was real strong in her support of Obama, so, it only makes sense she be the one to suffer for the cause.
    Hope and change..it has arrived.

  23. markm says:

    Looks like the Obama Administration is testing the waters on the idea of raising taxes on the middle class

    http://news.yahoo.com/s/ap/us_plummeting_taxes

    ….huh….odd that.

  24. Jim says:

    The plummeting tax revenues are to be expected: as the tax system gets increasingly skewed to “the Rich” anytime they catch the cold, the government will get the flu. Those who make $250,000+ a year have tremendous volatility in their income as the tax results are showing.

  25. markm says:

    The plummeting tax revenues are to be expected

    As are increased taxation to those in the lower quintiles. The top couple percent cannot, or, will not foot the bill for long.

  26. Joe Camel:

    How do you spell “douche?”

  27. Drew says:

    “How do you spell “douche?” ”

    This from the guy who has stated he wants the entire health care system overhauled because of his narrow personal issue.

    Rich

  28. Drew:

    I do have some personal issues with health insurance. But that’s not why I want reform.

    I make a very nice living. And unless I stroke out tomorrow I’ll continue earning a very nice living. So while the health insurance system is stupid and amoral and wasteful, I’ll find a way around it. It’s a waste of time, a waste of energy I could be putting into my work, a waste of money, but I’ve found a work-around.

    Most people in a similar situation cannot afford to do the same.

    I’ll be one of the people getting nailed with higher taxes for reform. Which I am willing to pay if it means that those less lucky than I can get decent health care for themselves and their kids.

    I want health reform because American citizens should not end up bankrupted by health care costs. And American citizens should not have to choose between getting shots for their kids, or taking their kids to a dentist, or buying them school clothing.

  29. steve says:

    Having followed the charts on our debt for quite a while, and following how both parties do not cut spending, I have assumed for years that taxes will go up at some point to pay off the debt.

    Steve

  30. floyd says:

    Michael;
    Why wait for the government to put a gun to your head?
    If your motive is really compassion, start paying other people’s bills without being coerced or being a party to coercion.
    Why wait to supply the hand of tyranny with the weapons to play Robin Hood? [Although,the green tights might be popular garb for left wing tyrants!] Start paying voluntarily today!
    After-all, charity at gunpoint is hardly charity at all… is it?

  31. Steve Verdon says:

    Michael,

    Hardly. If I said I won’t discriminate against black people, and I discount a black candidate because he doesn’t have the requisite skills, does that mean I’m going back on my promise?

    You’re playing word-games Steve, and I don’t understand why given the number of legitimate criticisms you have against Obama.

    I’m sorry, but no. Obama promised to not raise taxes on people making less than $250,000/year. He promised that 95% of working households with income under $250,000/year would get a tax cut. By increasing the cigerette tax those claims are not true. Its just that simple.

    Markm,

    You are aware of the difference between tax rates and tax revenues. It is possible for the first one to go up while the second goes down. I’ll give you a C- for effort though.

    Michael Reynolds,

    Given your recent post on how you’d be quite happy to work extra for simply $0.01 more you’ll forgive Drew and I if we don’t consider your….”insights” into economics all that seriously.

    I’ll be one of the people getting nailed with higher taxes for reform. Which I am willing to pay if it means that those less lucky than I can get decent health care for themselves and their kids.

    Soooo…your earlier complaints about the cost were…what? Seriously, you posted that we needed reform because you feel you pay too much. You claimed we could go with the French system (we aren’t) and have enough savings to buy France (we wont).

    I want health reform because American citizens should not end up bankrupted by health care costs.

    Despite the fact that just about every country out there is heading towards “bankruptcy” on a national level due to health care. Yes France isn’t going as fast as us, and neither is the Nehterlands. Yes, switching to a similar system would likely help us (and I’d support such a switch–just to be perfectly clear), but it is doubtful it would solve the problem by itself. Switching to the British system could very well be worse (and it is possible Obama prefers an British/Canadian style system–link, link).

  32. Michael says:

    I’m sorry, but no. Obama promised to not raise taxes on people making less than $250,000/year. He promised that 95% of working households with income under $250,000/year would get a tax cut. By increasing the cigerette tax those claims are not true. Its just that simple.

    So your interpretation of his promise is that he would not increase any tax that might impact someone in the middle class? That he was limiting his options to just the income tax on the upper and lower classes? I’m sorry, but I can’t accept that interpretation as intellectually honest. When people talk about taxes paid by a group defined by their income, they are nearly always limiting the scope of their discussion to income tax, sometimes payroll tax, but almost never sales tax.

  33. Steve:

    Your response to me is either stupid or dishonest. Your choice.

    I wrote a post entitled “Michaelnomics.” Here’s one of the first grafs:

    I’m no economist. (Also no brain surgeon, rocket scientist or hedge fund manager.) But I understand my own, personal economics.

    From there I went on to explain that while a higher marginal rate would annoy me, it would in now way dissuade me from taking on additional work.

    You then, in a comment, managed to convince yourself that this meant I’d work for another penny.

    You’ve provided a nice example of why no one listens to economists. I don’t work in the “abstract” or “theoretical” worlds. I work in the real world. And here in the real world, no one ever says, “Hey, Michael, wanna write another book for a penny?”

    They say, “Hey, Michael, wanna write another book for 100k?”

    So with that as our starting point, I made the case that even in some dark, dystopian future where my net dropped from the current 60k to 40k it would still be worth my writing the book.

    Of course in reality the drop is more likely to be from 60k to, say, 55k. And yes, it’s still worth it. Here in the real world. Where one can actually buy neat stuff with 55k. Not as neat stuff as you can get for 60k, but still pretty neat.

    Since most of the tax increases under discussion affect only the top 1% or 2% of earners, and since we don’t get to that point by working in units of a penny, Steve, or for that matter by working in a theoretical world, most top earners face dilemmas pretty much like mine. In other words, we have choices that go like this: Should I do some more work and only earn an ass-load of money instead of my usual ass-and-a-half-load?

    For me the answer is: yes! Because I find that more money is better than less. Of course that’s just me.

  34. Steve Verdon says:

    So your interpretation of his promise is that he would not increase any tax that might impact someone in the middle class? That he was limiting his options to just the income tax on the upper and lower classes? I’m sorry, but I can’t accept that interpretation as intellectually honest.

    I don’t care what you accept that was what his candidacy/platform contained. To the link I provided there is a link to Obama’s campaign website:

    Under the Obama Plan:

    Middle class families will see their taxes cut — and no family making less than $250,000 will see their taxes increase.

    Michael Reynolds,

    From there I went on to explain that while a higher marginal rate would annoy me, it would in now way dissuade me from taking on additional work.

    You then, in a comment, managed to convince yourself that this meant I’d work for another penny.

    That was your logic. Not mine, please keep in mind I was trying to show how your logic was flawed. Maybe if you actually considered the occassional abstraction or theoretical construct….

    Anyhow, your logic was 40% of something is better than nothing. By that same reasoning $0.01 is better than nothing. Clearly you wouldn’t take on additional work that left you just $0.01 more. I noted that. I noted it would likely be the same for $0.02. I then noted we could work our way back to the implicit tax rate at where you’d be indifferent between taking on the additional work and not taking it on. That is, precisely the point that people make when they say that higher marginal tax rates can disuade people from taking on additional work. In fact, higher marginal tax rates might even induce them to work less than they currently are working. In the end, you are agreeing with me, you just don’t know it.

    You’ve provided a nice example of why no one listens to economists. I don’t work in the “abstract” or “theoretical” worlds. I work in the real world. And here in the real world, no one ever says, “Hey, Michael, wanna write another book for a penny?”

    You are a fool to think this way. Everyone uses abstractions and theoretical constructs. Reality is messy and we often “assume away” aspects of reality that make trying to figure out a probelm intractable. Not just economists, but all people engaged in science of any type. Yes, those assumptions may cause problems, but that is why any science is an iterative process. You develop a model, see how it matches up to reality, refine the model, check again, refine again, check again, ad infinitum. Its what most people call a learning process.

    Of course in reality the drop is more likely to be from 60k to, say, 55k. And yes, it’s still worth it. Here in the real world. Where one can actually buy neat stuff with 55k. Not as neat stuff as you can get for 60k, but still pretty neat.

    I thought you didn’t work with abstractions? Oh well, we’ll let this little inconsistency slide.

    Would you still work for $1K? How about $10K? $20K? $30K? We know $0.01 is out as is $0.02. So at what point would you say, “Oh, its just not worth it. I like writing, but I like doing other things too, so no thanks.”

    For me the answer is: yes! Because I find that more money is better than less. Of course that’s just me.

    So….you will work for that penny? I have a dime here….

  35. Steve:

    Now you’re being deliberately obtuse.

    I am astounded that you actually seem to think you know better how to judge my personal business than I do. You’re using a reductio ad absurdam argument of a kind that would only impress a child or an academic.

    Of course there’s a point at which I would stop working more. But that point is an abstraction. It does not happen in the real world. Which is where I have to pay my real bills with real money.

    In the real world we’re talking a few points one way or the other. And it has no effect on my real world calculations.

  36. Steve:

    Let me add a bit more about the real world.

    Over here in the real world I owe my taxes. I don’t have the money. My publisher says “Hey, want some money?” And I say, “Yes, I would.”

    So I write another book. In order to pay my taxes.

    Now, I write the book and let’s say I get paid 100k. The book is released and sells 50,000 copies. (That would be about my break-even point, or my earn-out as we would say.) The book retails for $20. So the bookseller, publisher, paper mill, truckers etc… split 90% of that million, leaving me with my 100k.

    Of course there may be a movie deal, which results in millions more pumping into the economy.

    And why? Because Mikey owes the IRS some money. If didn’t owe the money, maybe I’d take it easy.

    No doubt all of that’s completely crazy in theory. Which is why theorists are usually ignored by real people.

  37. Well, in my business I have to borrow money to increase capacity so that I can make more money. Borrowing money, assuming it is available, is taking a risk, especially right now. If you decrease my potential profits by raising my taxes or otherwise increasing the costs of doing business through health care insurance “fines” or regulation you just bent the risk/reward curve towards me not being willing to take the risk, hire employees, pump money into the economy, etc., hence no increase in economic activity, no additional money (or value or productivity) pumped into the economy.

    Just me, but I think my business situation involving the need for credit, new employees, and risk/reward considerations is a lot more typical of the rest of the world then yours Mr. Reynolds. It’s great that you can write a book to pay your taxes, but just write another book as advice to anyone else sounds like a modern day, “let them eat cake.”

  38. Steve Verdon says:

    Let me add a bit more about the real world.

    Over here in the real world I owe my taxes. I don’t have the money. My publisher says “Hey, want some money?” And I say, “Yes, I would.”

    So I write another book. In order to pay my taxes.

    I really don’t see the point here. You are saying you’ll work to pay of something or the government will engage in violence against you. Well no kidding people will work in those circumstances. You have now retreated to a very special case. I don’t see how it goes against the larger “conservative” point you’ve tried to refute.

    By the way, it isn’t a conservative point, but one that follows logically from those silly and stupid economic abstractions and theories. You know the ones that give us the laws of supply and demand. Sure hope you never use phrase that in any of your writings or conversations with people. If you do, imagine me slapping you in the back of the head whenever you do. Kind of like how Bud Abbott used to give Lou Costello a smack for saying or doing something foolish.

    Now, I do admit that conservatives probably over play this hand. Taxes go up and the world wont end. The economy wont come to a screaching halt. Will it lower growth? Yeah probably. How much? Good question, probably not as much as conservatives say, probably more than liberals say. Yeah that might be open to the fallacy of the middle ground, but oh well, I’d still pick the mid point as the best guess since I know each side has their biases.

  39. Steve:

    My point is that taxes are just another expense, no different at the subjective level from mortgage or car lease or insurance. In any given month I earn some money to pay for all these things, taxes included.

    Since I’m unable to print money (dammit) I have to earn it. The higher my mortgage the more I have to earn to pay it. The higher my taxes the more I have to earn to pay them. So taxes actually act as a spur to me, and that ripples outward through my industry.

    Put another way, if my taxes were lower I’d produce less, because then I’d have plenty left over for mortgage etc… Granted, I might buy a bigger house, and maybe that would motivate me to work harder in itself. But there are few motivations as convincing as a letter from the IRS.

    I don’t think this is just me. Willie Nelson rebooted his entire career to pay off the IRS. I suspect a lot of “creatives” find themselves in similar positions. Anyone who is a position to increase his production might find himself — as I do — forced to be more productive because of taxes.

    One other point: if it’s true that higher tax rates depress productivity, shouldn’t we see state by state differences occasioned by higher or lower state taxes? Shouldn’t residents of FL with no state income tax be regularly outperforming we poor saps here in 9% CA?

  40. Steve Verdon says:

    Michael,

    You are trying to defend your initial point with a special case.

    Yes, put a gun to someone’s head and they are likely to work even if they normally wouldn’t. It is not shocking and has damn little to do with how people respond in general to changes in marginal tax rates.

    Put another way, if my taxes were lower I’d produce less, because then I’d have plenty left over for mortgage etc… Granted, I might buy a bigger house, and maybe that would motivate me to work harder in itself. But there are few motivations as convincing as a letter from the IRS.

    So for you, you are on the backward bending portion of your labor supply curve (don’t laugh, google it). The tax decrease acts like a wage increase, but given your income is already high you’d rather have the extra leisure. Higher taxes act as a wage cut thus inducing more labor supply. Again, a special case–i.e. you are damn lucky to be at a point where you feel you make more than enough money that you’d reduce your supply of labor for a wage increase. But this is generally not true for the majority of workers. Basing much on this special case is not a good idea.

    One other point: if it’s true that higher tax rates depress productivity, shouldn’t we see state by state differences occasioned by higher or lower state taxes? Shouldn’t residents of FL with no state income tax be regularly outperforming we poor saps here in 9% CA?

    Yes, if all other things are equal. But are they? You just can’t look at the gross statistics without controlling for confounding factors. For example, is the educational level higher or lower in Florida vs. say New York. Age of the population might play a role as well. And then there are county and city taxes that could mess things up. Plus, there are individual differences, a person who puts a higher value on leisure time would be more likely to not take on extra work than someone who does not value said leisure time as much.

  41. Not Steve, but here goes…

    My point is that taxes are just another expense, no different at the subjective level from mortgage or car lease or insurance.

    Nonsense. I choose how big a mortgage to take on or what car to buy and how to finance them. If I stop paying for my car someone repossesses it. They can’t put a lien on anything else I have, garnish my wages, or put me in jail. I left houses out of the last sentence as Barney Frank and pals are threatening to make foreclosure illegal. Good luck getting your next mortgage if they succeed. I have very little control over how much my taxes are and even less about how I pay them.

    So taxes actually act as a spur to me, and that ripples outward through my industry.

    Ever heard of charity? Or is being motivated for others only valid if he government does it?

    But there are few motivations as convincing as a letter from the IRS.

    Not all motivation has to be external. I take my responsibilities to my employees quite seriously and I don’t need a letter from the IRS to reinforce that. Being able to live with myself is a greater motivator than a letter from the IRS.

    Willie Nelson rebooted his entire career to pay off the IRS.

    Perhaps the first dozen or so letters from the IRS didn’t provide sufficient motivation for poor Willie. There are plenty of instances of folks with 9 and 10 figure incomes who for whatever reason don’t pay their taxes. I do not feel the least bit sorry for Willie Nelson.

    I suspect a lot of “creatives” find themselves in similar positions. Anyone who is a position to increase his production might find himself — as I do — forced to be more productive because of taxes.

    I suspect a lot of “non-creatives” find themselves to be forced to be more productive because of competition, local and global. Jeez, do you have any idea how elitist you sound?

    One other point: if it’s true that higher tax rates depress productivity, shouldn’t we see state by state differences occasioned by higher or lower state taxes?

    Ceteris parabis, sure, but ceteris parabis doesn’t hold. You have to factor in all sorts of factors other than just tax levels to explain the difference between, say, California and Arizona.

    Shouldn’t residents of FL with no state income tax be regularly outperforming we poor saps here in 9% CA?

    Perhaps they are, at least the ones who are working. I don’t know. But I do know that the citizens of Alaska are not less productive than those of California just because their taxes are lower.

  42. Not that it matters, but my post was independent of Steve’s. It is flattering that we said some similar things here and there.

  43. You went all the way over to my moribund blog, found a post called “Michaelnomics” in which I argued from my own experience. You decided to insult me. And then back here you decided to insult me again.

    I concluded:

    Higher marginal tax rates don’t make me want to work less. They make me want to work more. I suspect they have the same effect on anyone who is in a position to increase his productivity.

    In other words, it was openly a special case which I applied to people in a roughly similar position. That is to say people who are able to choose whether to work more.

    So now you basically admit that I’m right as to myself. Which leaves you to argue what? That I’m the only person in the country in a similar position?

    Or maybe things have changed. Maybe a growing portion of the country is in a similar position, especially “creatives.” I’d argue people in similar positions as mine are more prevalent in the top 1-2%, the only population threatened by rising marginal rates. Maybe that would explain why so many people in silicon valley as well as in the arts support Democrats. Maybe we just aren’t all that terrified by another 4 or 5 points in taxation. And maybe we have good reason not to be.

  44. Charles:

    What does repossession have to do with anything? Again, moving back to the real world, I write checks every month or every quarter. Whether I pay them to Audi or to the IRS it’s money that leaves my pocket. It’s an expense.

    Ever heard of charity?

    Why yes, I have. But charities don’t scare me as much as federal prison. Your point is what?

    And then it all goes fuzzy doesn’t it, when I point out the state tax conundrum. You and Steve both. You get very wispy, very airy fairy.

    Listen: I just moved back from Italy. I could live in any state. I can cite the state income tax rate of just about every state by heart because I’ve researched it. I chose California. And don’t talk about sales tax, property tax and the rest, as your income climbs those shrink to relative insignificance. It’s ALL about the income tax.

    So I — and a whole hell of a lot of creatives — decide to move to California rather than Texas, Florida, Tennessee or Alaska, all zero income tax states. My tribe is overwhelmingly in CA and NY.

    We knew we’d get hosed on taxes. So when we chose CA we decided, “Well, I guess we’ll work harder.”

  45. Drew says:

    Ah, but Michael. At Glittering Eye you made it quite clear that your personal situation was your motivating factor in supporting government run health care. Your words, not mine. Several posts. Retracting that now? (By the way, did you see my comment to form an LLC to avoid your tax issue?)

    Second, the taxes as a natural expense argument is bizarre. That expense is incurred only with income, not the other way around. And it is variable with income.

    Lastly, you might be a fine and creative writer, but facility with economics and the rather extensive body of work on the effects of taxes on incentives and business – certainly small business – is not your strong suit.

    It may make you feel better to be dismissive of Steve Verdon as a “theorist” and not a “real person.” But Charles Austin is a business owner, and I’ve been an owner in approximately 18 businesses over the years, ranging in revenue from $30 to $300MM. And I’m here to tell you as a “real live” business owner, that Verdon’s world view is closer to reality than yours by – as we used to say in Indiana – a country mile.

  46. floyd says:

    “”Why yes, I have. But charities don’t scare me as much as federal prison””
    “”””””””””””””””””””””””””””””””””””””””””””””””
    Let me get this straight, in a free society, the will of the people can only be expressed when they are motivated to do the “right thing” through the threat of federal prison?

  47. Floyd:

    Do you even make sense in your own mind?

  48. floyd says:

    Yup, but it disappoints me when you miss the point.
    I merely gather that you think that a person must be coerced to do what he truly believes to be right.
    If a majority truly believed that there was a need to insure the present small minority who live without insurance, they could easily take care of the problem without dragging those who disagree along to participate, coerced by the threat of federal prison.
    Get my point?

  49. Steve Verdon says:

    In other words, it was openly a special case which I applied to people in a roughly similar position. That is to say people who are able to choose whether to work more.

    You went from your personal case to the general when you wrote, “I suspect they have the same effect on anyone who is in a position to increase his productivity.” That is a generalization of a special case, it is faulty logic. It is called generalizing from and unrepresentative sample.

    So now you basically admit that I’m right as to myself.

    Sure, quite a few people might be on that portion of their labor supply curve…but even more are not. Hence making any kind of conclusion is decidedly a dubious propostion. I called you on it. Quite simply you have no argument here save for two special cases:

    1. Coercion–i.e. paying taxes
    2. Some people are on the backward bending portion of their labor supply curve.

    Your problem is when you generalized to anyone who can increase their level of productivity…those people are not necessarily on the backward bending portion of their labor supply curve. People on that portion of their labor supply curve are people who have extremely an high (implicit) wage. In other words, the guy making $11/hour could increase his productivity. I doubt he is on the backward bending portion of his labor supply curve. Basically, people on that part of their labor supply curve see leisure as an inferior good. As the price for leisure goes down they consume less of it. Now if that seems…weird to you that is at least weak evidence that your generalization from the special case is not really sound thinking.