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Michaelnomics (Updated)

One of the many religious tenets of the Church of Saint Ronnie O'Reagan is this: if you raise marginal rates on the well-off, the well-off will stop trying to earn money. You can see some of that in comments here.

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

By virtue of being just so darned brilliant I have a good couple of years ahead economically. (Touch wood, throw black cat over shoulder. Or however that goes.) In fact, I have an ass-load of work. And for that work I'll earn half an ass-load of money.

But, let's say a publisher suggests that I might be in line for still more work. At roughly the same time Mr. Obama and Mr. Schwarzzenegger sidle up beside me, each armed with a big tube of KY and looking for a little Michael love.

So, knowing that my marginal tax rate is going up, what do I do? Duh. I jump at the chance to work harder. Why? Because . . . and Republicans might want to lean close to hear this . . . 40% of SOMETHING beats hell out of 60% of NOTHING.

See, kids, here's the thing: if I have a choice between more money and less money, you know what I always choose? More. I know: controversial. But me, I like more. It's so much better than less.

Let's break this down for the slow class. Let's say this publisher offers to pay us 100k. In the old days that would translate to 60k. Now it will translate to 40k. The Republican theory is that I would LEAP to snatch up that 60, but RUN AWAY from the 40.

And you wonder how they managed to bankrupt the country.

In fact, and here's the salient point, I will take the deal in part because of the tax increase. That's right: I will work harder because of the tax increases. You know why? Because all my other deals just went from 60 to 40, too. And, as discussed above, I like more money rather than less.

Mr. Obama and Mr. Schwarzzenegger are going to take 60% rather than 40%, so I have to make that up somewhere. Right? I'm going to make it up by working more and harder. In other words, I'll have to become more productive. And in the process I will create jobs. Most of that money will go to editors, publicity people, lawyers, corporate weasels, Borders truck drivers and Barnes and Noble clerks.

If Republican theory were correct I'd turn down this theoretical deal. Which I would do. If I were a fucking idiot.

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.

UPDATE #1: It may not be obvious but the 40%/60% numbers are place holders. God only knows what the actual numbers will end up being.

UPDATE #2: For a much more thoughtful, well-researched post on the subject go here.

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“Michaelnomics (Updated)”

  1. Blogger Ruth Anne Adams Says:

    For a person who is a sole proprietor of a word factory, your analysis is correct. But for someone like me, a widget-stamper in a big corporation who will basically get paid as long as I fog up a mirror and don't commit a felony, it means that I won't put in overtime because there's no net benefit to me. So keep in mind that your paradigm is not my 20 cents.

  2. Blogger Michael Reynolds Says:

    If you're really just a widget stamper how do you earn more than 250k?

    If you make less than that you'll get a tax cut.

    But, assuming you make 250k now, and have the option of taking on overtime work, how do you figure it wouldn't pay? It would pay somewhat less than it does now, but more than nothing.

    If you don't need the extra enough to work for it, that's good. But the increase in marginal rates will fall disproportionately on those who are in situations analogous to mine: people who could probably ramp up to compensate.

    Let's say I wasn't a one person sole proprietorship I've employed ghostwriters at times. Why wouldn't I still want to do so under these circumstances? The only increase in taxes is on dollars over 250k, I'd still rather have more than less, and if I was hiring people to do the work that wouldn't change.

    Sorry, but this is an article of Republican faith that's only slightly more plausible than transubstantiation.

  3. Blogger Ruth Anne Adams Says:

    As a married person, the rate applies to the two of us when we jointly earn over $250K. I can be a widget stamper and my husband can be a white slaver and we're in the same rate category. But you don't think that a tax increase to $250k and up will be kept to themselves do you? That's bound to be spread around in very creative ways. You must agree that there's a tipping point even for you. It might not be 60-40. Maybe you'd be more inclined to sit on a porch and smoke a cigar and not write if 90% of what you 'made' went to the government. So then we're left to just haggling over the price.

  4. Blogger Tom Strong Says:

    Technically, it's not a Republican theory - it's an economic theory, and one that is well-substantiated.

    That said, I completely agree with Transplanted Lawyer here. The tax hikes will incur complaints, but are not severe enough to result in any change of taxpayer behavior, particularly for anyone close to the low end of the income bracket.

    I do wish the Obama administration would decrease the tax burden on small business owners, though. We need to foster entrepreneurship now more than ever.

  5. Blogger amba Says:

    We're not talking about 60-40, we're talking about the difference between 35% and 39%, correct? Or are you adding in increases in capital-gains taxes?

    Nobody is talking about going back to 90 percent confiscation. This is one of those cases where quantitative translates to qualitative at some tipping point. What is that tipping point? This tax increase is probably enough to piss people off on principle, but not to appreciably change their behavior.

    That said, Tom is right. But the more tax breaks you give, the more spending you have to cut (ha ha) or the more debt you will incur . . . and isn't that how we got here in the first place?

  6. Blogger Michael Reynolds Says:

    Tom:

    Why do we need to give tax breaks to entrepreneurs? Aren't taxes just another cost of doing business? And so long as all entrepreneurs face the same taxes, aren't they all operating on a level playing field competitively?

    I've had employees in the past and I'm looking at possibly hiring someone in the future. You know what bothers me much more than the associated taxes? The fucking paperwork associated with employing anyone. In other words, it's not the money, it's the hassle.

  7. Blogger Michael Reynolds Says:

    Amba:

    No, it's not going to be 60/40, those were place holders because, remember, I have California tax hikes coming, too an I don't think it's clear what that's going to be. But it'll end up being a fairly small total number, nothing that's going to cause me to move to Argentina.

    There would be a tipping point, I suppose, but it would have to be pretty high. It comes down to actual dollars: would I work for a million but spit on 300k? It's hard to imagine that day coming.

    There are also emotional factors. People aren't calculators. We don't necessarily do the math, we live our lives and play our roles. So there might be a point at which taxes rose so high I'd eschew extra work, but I'm ambitious and a workaholic so it'd be a pretty high number.

  8. Blogger Tom Strong Says:

    Michael,

    The question isn't whether the self-employed are competitive with each other, but whether they're competitive, on the whole, with the other-employed. And as I'm sure you're aware, the self-employed have to pay the totality of their Social Security and Medicare Taxes, because they don't have an employer to supply a matching contribution.

    Conservatives like to call that "double taxation," which is a bullshit talking point. But it has a core of truth to it - while they don't have to actually pay double taxes, the self-employed do pay more taxes relative to their salary. Since the self-employed also generally make less per hour than an employed person with an equivalent position, and incur considerably greater risk (in terms of bankruptcy, etc.) and hassle (in terms of paperwork, etc.), and work longer hours with fewer vacations - the net result is a lot of disincentives to entrepreneurship.

    Which is OK most of the time - many people are not cut out to be entrepreneurs anyway. But in a time of rapidly rising unemployment, we shouldn't also be decreasing the incentives for self-employment.

  9. Blogger Michael Reynolds Says:

    The extra helping of social security is a problem, but it's also one that kind of goes away if you grow your business sufficiently. It's capped, so a payment that's a big burden at one level virtually disappears from the radar over time, assuming of course that the business succeeds.

    But yeah, it's a burden when you're trying to get started. Maybe that's a good tax change to make. First reduce the extra half for the self-employed, then raise the cap to compensate. As it is right now, whether it's self-employed or regular employee, it's regressive.

  10. Blogger Steve Says:

    So, knowing that my marginal tax rate is going up, what do I do? Duh. I jump at the chance to work harder. Why? Because . . . and Republicans might want to lean close to hear this . . . 40% of SOMETHING beats hell out of 60% of NOTHING.

    Reminds me of the time one of the Koreans in my macro-economics class suggested just this thing to the professor. The professor suggested he work out the theory, find the empirical evidence and then publish it, becuase it would turn everything economists had been observing and thus believing for quite some time on its head.

    You lack and appreciation for making decisions at the margin. Do I take on that extra work, and pay higher taxes, or do I not and enjoy extra leisure time. Your argument is that so long as you get $0.01 more for all that extra work, DUH, you jump at the chance. ITS A WHOLE FREAKING PENNY MORE.

    Now you might thing, argumentum ad reductio...yes. The point is that there is a point where you look at your take home income, the amount of work you'll have to do and the fact that you don't have to do that work (and you'll still have income, its the extra income we are talking about here), and you'll just decide it isn't worth it.

    So you say, "No" for $0.01. You say, "No" for $0.02. And so on, till we find out exactly what take home income, and thus by implication what marginal tax rate you are just indifferent.

  11. Blogger Michael Reynolds Says:

    Steve:

    I live in the real world, not abstract world. So I think in concrete, real terms. We're not talking about a penny. Let's say we're talking about $100,000. So the question is never will I work for another penny, it's always will I work for another 40k as opposed to 60k.