HOW ABOUT A MAGIC TRICK?

Posted in Rants on October 13th, 2010 by Ed

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:

  • 1. Do not mention the small difference between the top bracket under the Bush cuts (36%) and without them (39.6%).
  • 2. Cover up the tiny real-world impact of this difference by compounding the investment in question over a ridiculously long timeframe. Over thirty years, his investment would be worth $1700 instead of $2000. $300 difference over thirty years of compound interest. That amount is a difference in effective rate of return of a little under 1% over 30 years.
  • 3. Compare the investment under "Obama level taxes" to how the investment would perform (over THIRTY YEARS) with no taxes at all. Don't compare it to, say, "Bush level taxes" or "some realistic tax rate that actually exists somewhere in the world." Compare it to 0%, which is the effective rate of taxation in, I don't know, Minas Tirith or Endor or something. Don't point out that what is worth a mere $1700 under Obama Level Socialism Taxes is worth a mind-blowing 300 additional dollars – over thirty years!!!!11!!!!one!!! – under Bush Level Freedom Loving Fuck the A-Rabs Taxes.
  • 4. Don't mention that the estate tax doesn't apply to estates valued at less that $3,000,000. Republicans are so good at this trick that it hardly is worth pointing out anymore. It's part of their DNA. One of two things is true, however: either The Estate of Greg Mankiw is worth less than $3,000,000 and the estate tax isn't relevant, or it is worth over $3,000,000 and I – nay, we – could give a flying dump what tax rate his kids have to pay on the three million dollars they did absolutely nothing to earn except be born and laugh at enough of Greg's jokes to stay in the will.
  • 4a. So, just to be clear, he slashes the hypothetical number in half at the end using the estate tax…which may not even be applicable here. His hypothetical assumes that it's applicable, probably because that assumption makes his argument look better. What does that $1700 look like without Greg's perplexing application of not only the Estate Tax but the maximum rate? (The 55% rate applies only to estates worth $10 or $20 million) Well, the Obama Level $1700 is actually about $3750, and the Bush Level $2000 is about $4500 if we don't quietly sneak in at the last minute and slash both numbers by 55% under the ludicrous assumption that Greg Mankiw is one of the wealthiest titans of industry in America.

    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.