CT Blue

This morning, Gregory Mankiw, one of the economists who got us into this mess and a shill for conservative economic theories, pens a New York Times op-ed piece in which he laments the tax disincetives to work supposedly embedded in the Obama Health Plan. (We are supposed to ignore the fact that the Rube Goldberg nature of the plan is a direct result of the right’s success at blocking the more obvious single payer solution). He leads off by giving us some economic insight straight from that font of all wisdom, Ronald Reagan, who the right has elevated into a latter day Saint:

The starting point for Ronald Reagan was the idea that people respond to incentives. The incentives that he most worried about were those provided by the tax system. According to his budget director, David A. Stockman, Mr. Reagan would regale the staff with stories of how he, as an actor, used to alter his work schedule in response to the tax code.

“You could only make four pictures, and then you were in the top bracket,” Mr. Reagan would say. “So we all quit working after four pictures and went off to the country.”

How fortunate for the country! A pity the tax rates weren’t even higher. We might have been spared Bedtime for Bonzo.

Meanwhile, Peggy Noonan laments the malaise brought on by high tax rates, particularly on those upon whom we depend to ruin our economy every now and then:

I talked with an executive this week with what we still call “the insurance companies” and will no doubt soon be calling Big Insura. (Take it away, Democratic National Committee.) He was thoughtful, reflective about the big picture. He talked about all the new proposed regulations on the industry. Rep. Barney Frank had just said on some cable show that the Democrats of the White House and Congress “are trying on every front to increase the role of government in the regulatory area.” The executive said of Washington: “They don’t understand that people can just stop, get out. I have friends and colleagues who’ve said to me ‘I’m done.’ ” He spoke of his own increasing tax burden and said, “They don’t understand that if they start to tax me so that I’m paying 60%, 55%, I’ll stop.”

I suppose we are supposed to feel sorry for this man, who even were he taxed at 60% would no doubt be taking home in a year more than most of us make in a decade. For myself, I have no problem if he stops-he does nothing that we need, and there will always be someone ready to step in and take his job, whatever the tax rate. The dirty little secret is that it takes precious little in the way of brains to work in the financial industry-all it really takes is greed.

What I find most interesting about these examples of the alleged destructiveness of high marginal tax rates is how they invite us to generalize from the special case. Most people are neither movie stars or insurance executives. We struggle to make a living day to day. We can’t quit, or go to the country if we don’t like the way the tax code affects us. It also, of course, ignores the benefits we sometimes reap from the taxes we pay.

Mankiw goes on to say that about the Health Care proposal:

A family of four with an income, say, of $54,000 would pay $9,900 for health care. That covers only about half the actual cost. Uncle Sam would pick up the rest.

Now suppose that the same family earns an additional $12,000 by, for example, having the primary earner work overtime or sending a secondary worker into the labor force. In that case, the federal subsidy shrinks, so the family’s cost of health care rises to $12,700.

In other words, $2,800 of the $12,000 of extra income, or 23 percent, would be effectively taxed away by the government’s new health care system.

According to Mankiw, a reduced subsidy “effectively” amounts to a tax. That’s an interesting observation, and I don’t necessarily disagree with his thinking. But the fact is that right now we are being “effectively” taxed by health insurance companies. If we get our coverage through our employers the ever increasing cost of that coverage precludes increases in pay. Those premiums are largely responsible for the fact that the American worker has seen his or her pay remain pretty flat, after inflation, for the past 20 years or so. That is effectively a tax, in the same way as the reduced subsidy results in a tax. But Mankiw no doubt would not see it that way, because it is the result of private, rather than government action. But if we’re talking about effects, then the effects are the same-it’s a tax. Given present day reality, the fact is that every dollar we spend on health insurance is effectively a tax. If we as a nation spend less under reform than we do now, then we have “effectively” lowered taxes.