How Socialism Kills Growth: Personal Work Incentives And Behavior Changes

[roo_ster]

You all have seen the new reports: "Heartless Republicans Block Program To Feed Pore & Starvin'."

Never is shown the entrepreneur who has to fire his least-productive employee because the tax hike that enabled the "Good Things To Pore & Stravin' People Act" to shovel cash at a problem.

Also, the unintended consequence of humans changing their behavior to either avoid paying the higher taxes or just not working as much as they would have in a less-confiscatory regime is never accounted for.

The following a an interesting look at the phenomenon.

Article below the divider:

http://gregmankiw.blogspot.com/2008/10/blog-post.html

Sunday, October 26, 2008
My Personal Work Incentives
Here is a question that you may have been thinking about: How do the different candidates' tax plans affect Greg Mankiw's incentive to work?

Okay, you probably haven't been thinking about this. But I have, because, after all, I am Greg Mankiw. And if you are here reading my blog, maybe you have some interest in the random thoughts running through my brain. So bear with me.

Let me start with my personal situation: I am a pretty lucky guy. I have a comfortable, upper middle class life style that includes one house, two cars, three kids, a wife, and a dog. I am fortunate enough that I don't have trouble keeping that going. I am also fortunate enough that I don't crave much more than I already have. I don't particularly want to own multiple houses or drive a Ferrari or wear Armani suits. You might say that I am close to being sated.

On a regular basis, I am offered opportunities to make some extra money. It could be giving a talk, writing an article, editing a journal, and so on. What incentive is there to put forward that extra work effort?

To a large extent, the beneficiaries of that extra effort are my kids. My lifestyle is, as a first approximation, invariant to my income. But if I make an extra few dollars today, I will leave more to my kids when I move on. I won't leave them enough so they can lead lives of leisure, but perhaps I will leave them enough so they won't have to struggle too much to afford a downpayment on their houses or to send their own kids to college.

Now back to the McCain and Obama tax plans. Here is a neat summary from the Wall Street Journal:



Let me try to put each tax plan into a single number. Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years?

The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids.

Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4).

For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.

If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.

Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.

The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

[RevDisk]

 
My stance on socialism is very simple.  Socialism, in overall terms, is generally rigged to help the poor (and populist pols, but let's put that aside).   This is allegedly at the expense of the rich, but most often falls on the middle and upper echelons of the middle class.  I grew up in a relatively lower middle class town, but saw plenty of US 'poverty'.  I saw real poverty mainly overseas in third world countries. 

Poverty is generally about a vicious cycle of making bad decisions.  It's all about short term (often bad) decisions without any real considerations for the long term.  There's nothing complex or noble about it.  People that are poor tend to value immediate consumables over long term returns.  Putting a few thousand bucks a year into alcohol, drugs or other 'escapes' is the popular choice, over say putting a few thousand bucks into training, education or just informational books.  Most folks in poverty generally do not look too kindly to putting their time and money into long term self-improvement.

I suppose most folks look to Ayn Rand as a prophet and champion the cause of 'titans of industry'.  Hrm.  Personally, I believe the true economic power of a country is a strong middle class.   Tilting the "most favored status" too much towards supporting the poor or the extremely rich probably is not a good idea.  Socialism tends to raise the standard of living of the lower class somewhat.  But it tends to put an economic cap on the development of the middle class.  It allows the transition of poor to very low middle class with relative ease, at the expense of being near impossible for someone in the very low middle class of reaching the upper middle class, let alone becoming wealthy.  The oligarchy of elites is ever present in any country, regardless of economic strategy.  It's opposite, Reagonomics or whatever term one prefers, of shifting the overwhelming amount of tax burden onto the middle class (the poor obviously support the tax burden even if taxed at 100%) also makes it difficult to move up the wealth ladder, until one reaches a recent point and then it's trivial to continue upperwards.

Ideally, it'd be nice to spread the load more or less evenly, with viable (and hopefully sustainable) ways of encouraging ways of moving up the wealth hiarchy if one is so inclined.  I'm logically inclined towards a generic flat tax, but that's just a placeholder until I hear something hopefully better.  Everyone who makes over $X has to pay (budget of the US govt / approximate number of tax payers) + 1%.  Most Flat Taxers however prefer to just tax wages and ignore capital gains, over just using the overall total income.

[Hutch]

Well, prepare to get bent over the table.  Check out this little find, a radio broadcast with Barry in 2001, including a helpful call-in prompt.

http://article.nationalreview.com/?q=YmFhYzIzMGQ1Y2FlMTA4N2M1N2VmZWUzM2Y4ZmNmYmI=

There's a difference between a big-government, nanny-state liberal and a stone-cold socialist.  BHO is that latter.

[zahc]

My wife heard Michael Savage call BHOs economic philosophy "Trickle-up Poverty". I brilliant assessment.

[roo_ster]

RevDisk hit on an interesting point WRT social mobility.

I think it can be borne out by the data that socialism generally removes social mobility for the vast majority of people.  Those on top stay there.  Those on the bottom are still there.  Drive & initiative don't get you very far.  The surest way to any smidgen of social mobility is for someone on the lower rung to score a government job or for someone a little higher up to score a gov't contract.

Contrast that to the more free economies where folks tear up & down the economic ladder.  Except for the persistent underclass (which stays underclass), most folks start out near the bottom and then move on up until retirement, where they plateau or even go down a bit , as they don't need as much income to support just themselves, sans children.

Entrepreneurial types and those more risk-insensitive can go up & down the ladder several times.  My FIL is an example of the type.  He can make money fast and lose it faster.  He's been the CEO of a multi-million dollar oil company and sold mobile homes while living in a trailer himself.  He's done all sorts of stuff in between.  He'll die with his boots on, trying to make a bundle one more time...or get shot by an irate husband at age 82.  "Risk-insensitive" is a term that surely applies to him.

[Manedwolf]

I think it can be borne out by the data that socialism generally removes social mobility for the vast majority of people.  Those on top stay there.  Those on the bottom are still there.  Drive & initiative don't get you very far.  The surest way to any smidgen of social mobility is for someone on the lower rung to score a government job or for someone a little higher up to score a gov't contract.

By design.

[El Tejon]

Also, the unintended consequence of humans changing their behavior to either avoid paying the higher taxes or just not working as much as they would have in a less-confiscatory regime is never accounted for.

So, no one has has Ludwig Von Mises?

[roo_ster]

So, no one has has Ludwig Von Mises?

Those making policy?  Doubtful.  Those reporting on the policy?  Never heard of him.

Remember, our gov't uses a static system for projecting tax revenues.  If the tax on "X" is increased by 10%, it is assumed that the revenues from taxes on X will increase by 10%.

[makattak]

So, no one has has Ludwig Von Mises?

Ummm... no one has READ Ludwig Von Mises?

No one outside of the Austrian school has great knowledge of him and NO ONE outside of economics knows his name.

Sad, really.

[MechAg94]

By design.

That is quite true.  Socialism/Communism is not intended to help the poor.  It is intended as a revolutionary method to put its leaders in power, and kick out others.  The poor are just tools to achieve that.  Ask the people who starved to death in the Ukraine if they were better off under Stalin.  Instead of being poor due to their own circumstances/decisions, they are now poor because they are slaves of the govt. 

Capitalism was never intended to be equitable, but simply to allow people to succeed or fail on their own with less interference from the govt or monopolies.  Try to make opportunity as equal as possible.  Outcomes are up to the individual.

IMO, the bad argument thrown out a lot now is the idea that some rich cabal is holding down the middle class or controlling the govt.  What people need to understand is that under ANY govt there will be rich and powerful people who have a lot of influence.  They will be there no matter what.  At least in a Republic, everyone has a vote in things.

[just Warren]

More generally this article shows just what government does to our standard of living. Imagine all those taxes going to productive uses over all these decades. Just how wealthy would we be? 2X 10X 1000X?

And that's just taxes the author does not mention the overwhelming negative effects of regulations.