Corporate & Securities Law

Now I know I must be right

I’m ready to move on from this debate about taxes, especially given the overwhelmingly negative response my post generated. But now comes an attack by a Nobel-prize-winning economist. See here. With respect to Prof. Krugman, I’m feeling more confident I’m correct after seeing he is with the dissenters on this.

Putting aside the false claims he makes (e.g., that I make $450,00o per year) that I’ve already pointed out, the dear professor says I’m engaging in self-pity and am “a sorry-for-myself person” because I might pay about 2 percent more of my income next year in taxes. This was not the point of my post. Some observations:

First, two percent of $450,000 (again, not even close to our income on the high side) is nearly $10,000. That is real money. Not so much relative to gross income, but it is relative to income after taxes, housing, food, debt, and other fixed costs. If about 50% of my income goes to taxes, 30% to housing, and 15% to other fixed costs, then 2% of my gross income is about 50% of my disposable income. So why doesn’t Prof. Krugman say that I’m a whiny loser because I’m complaining that the government needs 50% of the money I spend each month, on things like art camps?  It may be that some of the decisions I made that led to these fixed costs were mistakes, but there will be a real impact from this increase in my tax burden. I’ve not seen any critic point out why my Polish-American house cleaner would be better off getting handouts from the government than earning her wage cleaning our house.

Second, I stipulated that I would be happy to pay about $1000 per month more in taxes (way more than 2 percent of my actual income) if I believed that government would spend the money wisely. Doesn’t sound like self pity to me.

Third, my original post was about the practical impact of taxes on people declared to be so rich as to not face real tradeoffs from the increases. The best taxes are ones that people don’t notice. (Putting aside Pigovian taxes designed to influence behavior.) Although rich by most measures, our family will feel the loss of $1000 per month. Again, I’d be more than fine with this if I believed that this money would be put to excellent use. I’ve seen no evidence it will.

Fourth, notice the perversity of this argument from Prof. Krugman. So long as we are taking just a bit of your money, you shouldn’t complain. If a thief steals 2 percent of my income, I will really care. If instead, I’m asking to contribute 2 percent of my income to a worthy cause, then I might cheer. (We gave nearly that much to charity last year.) So the question isn’t really about percentages but about efficacy, which was the point of my post. This was lost on all the class warriors out there who only see what they don’t have but want, and want to use the threat of force to take it.

Fifth, lost in all of this is the impact of increased taxes on the work-leisure tradeoff. As marginal taxes rise, so does the disincentive to work. I’m asked with some frequency to write, consult, or testify, and when I do, I face the question of whether the effort and time is worth it. I can choose to watch the Steelers or help a hedge fund with a corporate law question. The higher my marginal taxes, the more likely I am to choose the former. This is a losing proposition from a social welfare perspective, no matter what you think of the quality of my advice or the role of hedge funds.

Full post as published by Truth on the Market on September 19, 2010 (boomark / email).