Anti-tax zealots are the Harlem Globetrotters of politics. Having mastered the arts of deception and loaded their repertoire with all kinds of sleight-of-hand tricks, they can magically turn any argument about taxes into a series of bewildering hypotheticals that collapse under the slightest hint of scrutiny. That just happens to be far more scrutiny than an American reader, TV viewer, or (especially) talk radio listener will impose on any argument that involves the appropriateness of our current levels of taxation.
Greg "Meadowlark" Mankiw puts on a legendary performance in his recent New York Times editorial, "I Can Afford Higher Taxes. But They’ll Make Me Work Less," which proceeds from the faulty premise that Greg Mankiw's work is socially useful and anyone gives a shit how much of it he chooses to do. Sweet Greg begins by placing himself in the income brackets that will be affected by the expiration of the Bush tax cuts, admitting that he won't exactly be suffering any hardships if that happens ("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.") Honestly, that is more than most whining top-bracketers can do, so I suppose we should give him a little credit for admitting that.
Any semblance of dignity in his argument deteriorates rapidly thereafter.
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.
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.
Most people don't want to see how magic tricks are performed. It takes away the sense of mystery and with it some of the enjoyment. If you are one of those people, look away, for I am about to pull back the curtain on Mankiw the Magnificent's version of the water torture cell.
The key to many magic tricks is misdirection. The preceding sentence is an example of misdirection, because the key to Mankiw's trick is simply to lie and omit a lot of relevant information. Here's how the trick works:
You, the magician, can use these tricks with confidence, knowing with deathly certainty that none of your readers will bother to check your math or peer underneath any of the fantastic assumptions so crucial to the structural integrity of this rhetorical house of cards. Be careful not to disturb the giant piles of bullshit; they are load-bearing.