Gregory Mankiw is a Harvard professor and author who decided to do a case study on the effects of raising taxes on those making more than $250,000. He chose somebody he knows well for the case study: himself.
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.
So, you say, why not raise taxes on these rich folks?
Well, there is a good reason: The bums will give themselves a tax break by not working as hard:
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. …
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.
It is also the evil rich who create jobs for us deserving non-rich.
If they don’t work, the chances of our working decrease.