HOW ABOUT A MAGIC TRICK?

Posted on | 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.

    • 37 thoughts on “HOW ABOUT A MAGIC TRICK?”

    • HoosierPoli says:

      In Germany, land of Socialism and Nazis, or whatever, I paid ZERO euros in income taxes, and less sales tax on groceries that I do here in VA. Granted, I was slipping into a weird tax bracket, but still: truly progressive taxation in the US would wipe out the Republican electoral base in perpetuity. Poor people feeling like they're paying too much in taxes is the only thing that gets rich people's taxes cut. Here's a thought: Payroll taxes on all capital gains and income up to any limit, no payroll taxes under poverty level wages = instant electoral majority for the next 50 years. But good luck with that.

    • eau says:

      Second, Hoosier.

      Here in the merry ol' land of Aus., when June 30 rolls around, everyone starts talking about how much tax they are about to be refunded. It's great. Smiling faces everywhere. I couldn't even tell you how much income tax I pay. Sure, I could go look it up, by why bother when I can just say "Roughly? Three parts of fuck-all. Oh, and then they give me a bunch of it back."

      Of course, Australian conservatives still spend their lives bitching about "My Tax Dollars" and "Incentivising (is that even a word?) the workforce".

      Right-whingers gotta whinge.

    • waldo says:

      Mankiw-eww's dishonesty is especially galling coming as it does from a perfesser but maybe he and his intellectual cohort, Putz Reynolds, can write something that celebrates their penchant for misleading and completely false dissertation. How about the courage honesty and intelligence of GW Bush?

    • acer says:

      Mancow's point stands. If this piece of shit is asked to contribute anything for his less obscenely fortunate humans, he'll slack off on his opinion columns. And we will all suffer.

    • Mark says:

      How can a Harvard professor get away with being this intellectually dishonest? Doesn't this guy have students, fellow faculty, etc. to call him on his bullshit?

      This is ridiculous. I don't give a shit about politicians because they're all whores and low lifes, but a fucking professor at Harvard?

      Disgusting.

    • Tim H. says:

      But paying more taxes would be like losing, and why not misapply sports metaphors to real life when it's so self-serving?

    • Bugboy says:

      @Tim H.

      Huh. I was talking to my bro about his job, he was telling me they hired some guy to do "boiler room" stuff and he said it sounded slightly illegal. I told him just because it sounded illegal doesn't mean it is…but he was telling me the owners were all college sports jocks who got MBA's and didn't know a damn thing about business or ethics…makes you wonder if they don't look at it like a game. Like you say, maybe that is the challenge, only losers pay taxes.

      Do they have athletic scholarships at Harvard? Seems the good prof made good use of his. Might be why he suffers no peer review.

    • economic geographer says:

      Nice takedown, but you missed one more magic trick: Mankiw's math is all dependent on his having "invested [the $1000] in the stock of a company that earned, say, 8 percent a year on its capital," and that this 8% return will compound. Needless to say, that is a completely unreasonable expectation for return over thirty years, and Mankiw must know that. Unreasonably high earnings expectations, however, make the pittance the taxes actually cost him seem much higher, so his hypothetical money all gets invested in what I can only assume is a magical unicorn factory.

    • Hawes says:

      I think you can go back and look at the basic psychological premise underlying all the supply-sider's arguments: More taxes will de-incentivize work.

      We all seek – in Mankiw's words – to be sated. Satisfied with what we have. That satisfaction is entirely relative to our expectations. My desires are entirely different from a migrant worker or someone at Goldman Sachs. Needless to say, the guy on Wall Street wants more. Of everything.

      If the government is taking more of his income, wouldn't he have to work THAT much harder to reached his level of satisfaction? Wouldn't the white shoe lawyer have to INCREASE her productivity to meet her arbitrary and elective standard of living?

      As a school teacher who hasn't gotten a raise in two years, I know that I have had to take extra work on the side and increase my workload in order to keep the roof from leaking and the kids in soccer cleats. Why wouldn't this be true of the cosmetic surgeon who wants a house in Martha's Vineyard?

      It seems to me, advocates of progressive taxation have ceded the essential point and chosen to argue the numbers. And since the average American can barely add to 20 without taking off his shoes, you're bound to lose that argument.

      Of course, whether we want the geniuses on Wall Street to work harder given their past performance is an open question.

    • John says:

      The sad part is, he even outright says he's full of shit right in the column. He starts with no tax at all (no taxes *of any kind*, not just income tax), comes up with 10K over 30 years, then compares it to a full tax load for the absolute most taxes you can possibly pay in the US for 1.7K over 30 years.

      And he does this because he knows his readers are stupid, and will only look at 10K vs. 1.7K and gasp "Oh lawd, dem dern lib'ruls and dere dern tacksis!".

      Even without all the sleight-of-hand of hiding the real numbers and using fantasy-land investments and base conditions, his argument is full of shit. Not even Republicans support zero taxation of any kind. They may *pretend* they do, but the funding for their precious military has to come from somewhere.

    • Monkey Business says:

      I would like to point out the obvious: even though he's tacked on taxes at a level that would make most accountants start screaming and stabbing themselves in the face, HE'S STILL MAKING MONEY. Yes, not as much. But last time I checked, $1700 is still more than $1000.

      That being said, expecting a conservative columnist to be intellectually honest in his argument is like pig wrestling: no matter what, you're gonna end up covered in shit.

    • anotherbozo says:

      In the Fat Chance! Dept., I just sent this off to the Times:

      To the Editor:

      N. Gregory Mankiw's column, "I Can Afford Higher Taxes. But They'll Make Me Work Less," in Oct. 9th Business section, deserved a response. Such a slight-of-hand skewering of facts and figures reflects poorly on academia, and certainly on the prestigious institution that employs Mr. Mankiw. Fortunately, a blogger in political science, not economics, eviscerated Mankiw's arguments and exposed him as intellectually dishonest. I would urge interested readers to go to

      http://www.ginandtacos.com/

      and look under the heading, "How about a Magic Trick?" posted October 13th. Intelligence and honesty are where you find them; unfortunately that is not always at the New York Times, or at Harvard.

      (signed)
      I've had some letters published in the Times before, so one never knows. Anyway it makes me feel better.

    • glf says:

      So basically he saying he's similar to the lazy people on unemployment benefits the politicians are always going on about, the ones who refuse jobs because supposedly the pay is less than the unemployment benefits they're getting.

      Just think if people like Bill Gates, Steve Jobs, Warren Buffet, Charlie Munger, etc. had decided they cared more about paying higher personal taxes. And rather than move into that higher tax bracket, they would work less and limit their businesses to a mom & pop enterprise instead of building their companies into powerhouses, employing thousands and fulfilling their visions.

      My brother and sister-in-law make over $250K and yeah, they say they would like to keep more of it but they have never said that extra taxation would make them work less. Because they still have more money now than they did when they made less than the $250k. They don't live extravagantly but they can afford to buy/do whatever they want when they want it e.g., cars, clothes, travel. And they're paying cash for their son's college education.

    • J. Dryden says:

      He lost me with the first sentence quoted here: "Suppose that some editor offered me $1,000 to write an article." Well, there's a universal condition–being offered high pay for low effort (Ed cranks out better stuff than this guy daily, for free, while maintaining a full-time job, a social life, and a regularly performing band)–*and* he has the option to refuse, apparently, which last time I checked, most people who have to work for a living do not. As my mother-in-law would say: Oy, the rich, such problems they have!

      Monkey Business and acer hit the nail on the head: this guy's logic is "I could make a lot for doing very little, but since I'm not making a lot *more*, I won't, especially since the excess would benefit others." I believe with this attitude, we've reached the point at which Jesus of Nazareth would say, "Dude, fuck that guy. Seriously."

      But there's a bright side to this: if he turns down such offers of work on a regular basis, we won't have to read his stuff!

    • jjack says:

      The Heritage Foundation has been running these kind of ads on the radio here in Montana. Their main points are 1) that little Susie won't be able to inherit the family ranch because of the estate tax (which, if I understand it correctly, is a complete and total lie because a family ranch would be exempt) and 2) the guy that is qualified as wealthy enough to pay the tax "doesn't feel rich" after putting his kids through college.

      If this theoretical Montana rancher spent all of his necessarily-huge savings putting multiple kids through a free ride at some ridiculously expensive Ivy League school, while I'm taking on crushing debt in student loans to finance my education at a relatively-reasonably-priced public university, they've already inherited plenty and I don't really give a fuck if they have to pay taxes on the rest of their free cash. It goes back to the article you wrote about how rich people "feel poor" because they're just as efficient at shoveling finding shit to spend their money on.

    • fuzzbuzz215 says:

      All this is well and good.

      But this is pure comedic genius: over thirty years!!!!11!!!!one!!!

      Dont know why but this line made me laugh out loud and stuff.

    • Matt says:

      In poor Mankiw's defense, he humbly elected not to make the absolute strongest case he could: If we were to assume that, in addition to 0% taxes, we also roll back all labor laws and the abolition of slavery, then we can conservatively assume that his investment would earn a modest 21% per year (since the corporation could avoid all employee costs except the bare minimum to keep them alive, assuming that doing so was cost-effective of course). Hence his investment would be worth $304,481 after only 30 years. Obama has cost him over $300,000!

      Will somebody, anybody, please think of his poor, soon-to-be-only-negligibly-less-impervious-to-destitution children???

    • nanute says:

      Hopefully, after reading Mankiw's article, the market will decide never to hire him again. A slap from the "Invisible Hand" is in order.

    • jazzbumpa says:

      Off to rehearsal, so no time to read the comments now. Will catch up later.

      Meanwhile, I did my own brief evisceration of Manny-poo, if anyone is interested. It was at the nadir of a quite nasty cold, so I was far from my usual snarkish self, and even farther from Ed's brilliance.

      http://jazzbumpa.blogspot.com/2010/10/mankiw-goes-galt.html

      The most striking thing about Mankiw is his god-damned dishonesty. It's what you always get from the right.

      Cheers!
      JzB

      P.S. I think Minas Tirith had a valued added tax, or excise on tobacco – something had to pay for all those walls and towers. Money doesn't grow on the white tree.

    • arguingwithsignposts says:

      Manciw responds to some of the people who have raised questions about his column with *surprise!* more magic tricks:

      If no one is proposing eliminating taxes, why compare the Obama policy to a world without taxes? Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources. It is crucial to know how far we are from that optimum. To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate. Thus, increasing or decreasing a tax rate by 1 percentage point has a small effect on economic well-being if the initial tax rate is low, but it has large effect if the initial tax rate is high. For the margin of adjustment I was discussing (work more now, let your kids consume the proceeds in 30 years) the distortion is very high once all taxes are taken into account. As a result, every change in this tax wedge has a large impact on the size of the economic pie.

      In short, Shut Up! That's why!

    • The Man, The Myth says:

      JJack? Are you a UM student. I am as well! Nice to meet you. I don't drive very much, but last week the last time I got behind the wheel I heard that advertisement and just rolled my eyes! Good comments everyone. I can't add much to it. But here goes: to me its depressing that we really do talk about these things every day because the Republicans tune never changes or evolves. I think to be a good person you ought to be willing to acknowledge that things gradually change in life – without change things become stagnant and take on characteristics of a cesspool. Why can't we ever change? What ever happened to experimentation in public policy? It makes me upset… oh well…

    • Wisakedjak says:

      Is it just me, or is the expectation for eternal growth a really odd concept? I mean, I hear economists talk about growing out of the current recession, but what are we growing on? Playing with numbers and imaginary money? Does that growth count?

      I mean, we live in a world where we don't lend money unless we expect to get back more than we gave in the first place, but isn't the expectation that we will always grow a little silly? We'll run out of room eventually.

    • Fifth Dentist says:

      If my taxes go up, I won't have the money to buy that winning lottery ticket. Meaning that I won't get to have the penis enhancement and go into making porn movies, where I would have earned a gajillion dollars. And after that I would have built my own private spaceship and flown to Mars and fathered alien babies with hot Martian chicks. And they would have inherited my gajillion dollars.
      Damn communism!

    • Bill says:

      I sent the link to Mankiw… I don't know if he liked it too much. His response was simply "thank you for the link."

    • Batocchio says:

      Nice, Ed. I was going to cover this from the "Hmm, how can I, Greg Mankiw, bullshit on this subject?" and link Delong and Drum's eviscerations of this, but this is excellent.

      Where are these reasonable, honest conservatives I keep hearing about? I can think of a few, but none of them are in office or are running the GOP. No honorable, sane, knowledgeable person can pimp Reaganomics or any of this Gilded Age, neo-feudalist crap.

    • The Red State Azzhole says:

      I'm a liberal and I want something for free.
      I know, we'll tax those who worked hardest for what they have.
      We'll tax those who already contribute most to society so the liberal can grow fatter and lazier and sit on thier azzes collecting hand outs.
      If you love America America and want to save her you'll vote Republican.
      If you want socialism, hand outs, and love taking what belongs to others you'll vote for the democrat party.

    • Tired of this bs. says:

      Dude, I was waiting for the snark tag and then I get to the forth line… Ur serious? I thought for a minute you were going for the taxing of the majority, especially those who actually do physical labor, you know, the liberal base?
      First line is the notice you are lying or snarking – real liberals do not want anything for free. Surprised? Then you have been listening to the wrong kool-aid.

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