November 23, 2012
SO YESTERDAY’S DISCUSSION OF MARGINAL TAX RATES raises a thought: In today’s freelance economy, will the impact of marginal rates on how hard people work be greater than in the past? I mean, if you have an old-fashioned full-time “job” paying X-dollars a year, you can’t easily cut back and lower your income. But if you’re a freelancer of some kind, it’s easy to say that once you’re paying 50% (or 40%) tax on your income you’d rather cut back and substitute more leisure time. With more people earning their living that way, and fewer in full-time jobs, I assume we’ll see a lot more of that than we would have, say, 20 or 30 years ago.
UPDATE: A reader emails:
With regard to your last comment on marginal tax rates, I really think that the Collins (the chiropractors mentioned in the articles lambasted on HuffPo, Slate and Mother Jones) are getting a very raw deal. There is no reason to suspect that they don’t know how marginal rates work. Given that they’re pretty much fee-for-service workers, the main way that they’ll make more money is to see more patients. If they see more patients, they have less leisure time. Hence, once they hit the higher bracket, every marginal patient is less profit to them, and the option of going on vacation is more attractive.
Weigel, Drum and Linkins all assume that the Collins don’t understand marginal tax rates because every patient brings in addition profit, simply not as much–the embedded assumption being that expansion is great marginal revenue is greater than zero. They don’t seem to understand that every hour worked (and thus taken from leisure) has an opportunity cost (and, indeed, a rising marginal cost). The Collins seem to have a perfectly good grasp of economics, and the journalists appear both clueless and, worse, cruel.
Of course, what’s odd is that they all make the same mistake.
Groupthink abounds. But yes, the more you work, the greater the value of your remaining leisure time. Set that against a declining return on additional hours worked, and it’s easy to see why people might stop working sooner than purely profit-oriented models suggest.
And another reader emails:
Please keep me anonymous if you use this.
I work in commission sales. I’ve earned a very nice income right below that $250K “threshold”. I’ve spent all of 2011 and 2012 in downsizing my expenses, paying off all debts, and conversing with my wife about how to best enjoy our now empty-nest status. A big part of our consideration is how much various taxing entities will be taking a piece of my hard-earned dollars. As a result, we will significantly reduce my income in 2013 so that I have a LOT more time to enjoy life. We’ll be very comfortable and my employer is very comfortable with me since I’m dependable and will reach my production goals that we’ve mutually agreed to. Could I earn a lot more? Yes. But I won’t because I don’t need to send any more dollars to Washington DC.
And reader Paul Stueck emails:
If I am the marginal consultant, the answer is yes.
My plan is to either raise my rates, so that there is less demand for my services (resulting in more leisure time between assignments), and\or to not take overlapping contracts as I’ve done previously.
(This from someone who worked from 3:00 AM to 11:30 PM to help out a client on Thanksgiving…)
I think we’ll see a lot more of this than many anticipate.
UPDATE: Reader Roger Bogh writes:
Regarding your discussion on the effect of increasing marginal tax rates on a consultant economy (http://pjmedia.com/instapundit/158226/) I have a point to be made on we salaried slugs. Namely, that many of us have spent the last four or five years getting out of debt and increasing cash flow. I was going to enjoy my new financial clout and freedom. Now I have to assume that various government entities will be grabbing at my new found assets. What is one to do? Well, I am number crunching the various tax increases I am about to be challenged by. My goal is to absolutely Zero Out those tax increases by increasing my 401(k) contributions, increasing my Health Flexible Savings Account, donating more to charity, and grinding on all of my potential deductions.
The end result is that I will have a backup Winnebago and a boat in my golden years. Maybe I’ll hire a couple of drivers for my Winnebagos rather than a boat and captain. I really don’t want all that stuff in my golden years but you have to do what you have to do.
Right now, I have mathed out the increase in my 401(k) required to zero out Kalefornea’s Proposition 30 and Proposition Z. Since I am not in the upper crust I am only going to have to zero out $150. I will time that for my first paycheck in January. The bummer is that zeroing out Governor Moonbeam’s tax increase will result in the Feds taking a cut in their revenue. Hope our Economic Black Swan President doesn’t let us fall of the cliff. If he does Kalefornea will wonder where all their money went.
Bring it on. If nobody on Capitol Hill will starve the beast I will…
Funny, I’m now reading James Scott’s new book, and he says (on page 14):
One need not have an actual conspiracy to achieve the practical effects of a conspiracy. More regimes have been brought, piecemeal, to their knees by what was once called “Irish Democracy,” the silent, dogged resistance, withdrawal, and truculence of millions of ordinary people, than by revolutionary vanguards or rioting mobs.
This response seems to me to be something like that — with the added aspect that it is actually encouraged by the regime’s own policy approaches.