Please Raise My Taxes?

In today’s NYT, Netflix CEO Reed Hastings asks for a tax hike (‘Please Raise My Taxes’).  He proposes “a top federal marginal tax rate of 50 percent on all income above $1 million per year” as an alternative to the proposal to cap executive salaries.  His rationale: “a shocking $20 million severance package would generate $10 million for the government. That’s a far better solution than what we have today, not least because it works with the market rather than against it.”

And he makes an argument that I have to agree with…  “Some will tell you that would reduce the incentive to earn but I don’t see that as likely. Besides, half of a giant compensation package is still pretty huge, and most of our motivation is the sheer challenge of the job anyway.”

It does seem to me that unless marginal tax rates are extremely high, such as well over 50%  (like back in the 1950’s when it was up to around 90% in the U.S.), companies and individuals still have plenty of incentive to take on new projects if they think they will be profitable.  I don’t think entrepreneurs, particularly of small businesses, take too much consideration of the marginal tax rate when making investment decisions – if it will be profitable assuming a certain interest rate, then it’s a go – otherwise not.  Would high-earning people turn down raises, and stop working hard, because of a 50% rate?

Besides the fact that no one likes paying lots of taxes, what’s wrong with this proposal?

For the Republicans: It appears that raising taxes is at this point permanently anathema to the Republican Party…  but I think the questions are (1) if tax cuts create great economic outcomes, why didn’t the Bush cuts do more to keep us out of this mess? (2) if taxes were to be lowered for businesses, why would that produce any business investment that wouldn’t be happening already today?  The problem appears to be lack of business opportunities, not lack of investment capital.  Unemployment is rising fast because of lack of opportunities.

For the Democrats: Even if you think this is a good idea, it would probably be just a drop in the bucket in terms of actual tax revenues.  Some form of stimulus bill will pass, and presumably that will lessen some of the pain that would have otherwise been experienced over the next couple years.  But at what cost?  Isn’t some structural adjustment necessary?  For the last few years we’ve been living increasingly on high levels of debt (on federal level and personal level).  One way or another it seems like we need to unwind some of the debt – how can we borrow our way out of this situation caused by too much borrowing?

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Comments

  • Jim  On February 7, 2009 at 8:44 am

    You must believe that Government processing of our money is more efficient than we processing our own money. Please comment.

    If you believe that, then it ends the discussion!

    Remember, the Corporate profits do not just go into the bank accounts of those greedy old executives. They go to bonuses for all levels, investment which then goes to the people who need the business, technology development, etc. and the Government is real good at all those distributions, isn’t it!

  • Curt  On February 7, 2009 at 7:06 pm

    The government provides certain functions that aren’t supported by the private sector (perhaps not always so efficiently, but there’s not always a choice). So if we as a people want those functions, then it seems like they should be paid for… sooner or later. For the last 7 years or so the U.S. has been running pretty big deficits (and in many prior years as well), and it appears that they will be getting even bigger for awhile.

    I guess the question is whether it is actually feasible to ‘grow’ our way out of those debts simply thru tax cutting? The elder Bush used to call that idea ‘voodoo economics’, and I tend to think he was right. But it appears to be Republican doctrine at this point.

    I believe that the business sector is best suited to finding profitable opportunities and pursuing them efficiently. However there are times when profitable opportunities seem to dry up… and it appears we’re in one of those times. In such a time I don’t believe that business tax cuts by themselves can foster much extra activity in the short run. (But I may be wrong… I’d like to understand the argument.)

    On the other hand, certain types of payroll tax cuts do seem like they would pump more money into the economy for spending today.

    Here’s a whole set of recommendations: Libertarian ideas to stimulate economy by Jeffrey Miron. Not saying I agree with every point, but it does seem to be a more strategic and comprehensive approach than I’m seeing from either party at the moment.

    Personally I think it would be a very good idea to retain help to state and local governments in the stimulus, to avoid things like mass transit cutbacks, library cutbacks, etc. Those are things that I think we need more than ever during a downturn. And I’m not too impressed with the idea of new housing subsidy tax credits… I think that sector still needs to settle, not be ‘pumped up’.

    Just in terms of the ‘high executive pay’ issue, I think what Hastings suggests is probably a better idea than trying to legislate salaries, which appears to be what will happen. One could argue that nothing should be done about the salaries, and that could be the best option of all, but once the public money is being provided to private businesses, it’s hard to limit the reach of the government…

  • Curt  On February 9, 2009 at 12:56 pm

    Something funny happened with your last comment… but I am re-posting it here:

    Let’s discuss a very small segment of the above discussion.

    I mentioned discretionary spending in business in another comment, and the fact that I assumed the Government would have specified reduction of it to the businesses they “bailed out”. Do you believe the Government has brought their discretionary spending under control and reduced it to an acceptable level?

    Do you believe any of the Governments spending is discretionary?

    Let me know what you think on those two questions and we will continue!

    A couple of articles in the WSJ Saturday pretty well summarize my beliefs on the stimulus/taxation issue. Interesting reads even if you don’t agree:

    The first is an editorial on the efficiency issue-

    http://online.wsj.com/article/SB123396676711659061.html?mod=djemEditorialPage

    The second is an editorial on the stimulus-

    http://online.wsj.com/article/SB123396623933859023.html?mod=djemEditorialPage

  • Curt  On February 9, 2009 at 1:12 pm

    In general I’d say that any organization has ‘discretionary spending’, so yes, I’m sure there are spending cuts that could be made in government that would not have a major impact on actual results. (Similarly for public companies that have strong brands and cash cows).

    While I agree in theory with some of what the WSJ has to say, in terms of wanting to “grow incomes through job creation,” in the short term I don’t see how corporate tax cuts will do that. If corporations see opportunities, they take them and expand. But few companies are expanding right now. If the problem is lack of access to credit (and it may be, it’s hard to tell), then trying to fix the financial situation is critical. We’ll see what the team proposes tomorrow…

  • Jim  On February 9, 2009 at 2:02 pm

    Re: discretionary spending: when we get into financial trouble, among other things, we immediately reduce our discretionary spending – you, I, and any entity that is in the free market – like all businesses (i.e., profit driven).

    I am unaware of any effort at all by our Government to reduce discretionary spending – not a partisan thing, by the way – and in fact the current stimulus has BILLIONS of dollar increases in this discretionary spending. Agreed?

    Please justify raising taxes – from an economic standpoint – given the above.

    Re WSJ’s “A spending Education”: in the stimulus package is $142,000,000,000 for schools – NEARLY DOUBLE THE TOTAL OUTLAYS OF THE DEPARTMENT OF EDUCATION IN 2007 – only year before last!

    I consider this “discretionary spending” – that is every public school student in the US today has a place to go to school – demographics are reducing the number of students – so putting this type of money into schools makes no sense!

  • Curt  On February 9, 2009 at 6:47 pm

    At this moment I don’t see good reasons to raise tax rates. In a recessionary time where signals on unemployment, etc. are not good, deficit spending seems justified.

    On the narrow point of high executive salaries and bailouts, I think I prefer the idea of raising the marginal tax rate than legislating salaries, but either way it’s a punitive move not a general case.

    The more general question is whether there is ever a time to raise tax rates? I think there was a general idea that committing to new programs would require a matching income source (or cuts in other programs), but in practice this does not seem to happen…

  • Jim  On February 10, 2009 at 12:13 pm

    Question is: do you see good reason to cut tax rates? Perhaps cut tax rates along with lowering discretionary spending, thereby avoiding deficit spending? A novel idea, I’m sure you would agree, but so simple our politicians seem to ignore!

    Is there ever a time to raise taxes? Certainly. When the Government shows they know how to run a successful “business” – another novel suggestion – and we can see that additional funds are necessary for the services we require from the Government, not for their “personal” earmarks, which is what the “porkapalooza” is – even though our President has the gall to brag that there are “no earmarks” in the Stimulus! How do you accept that statement?

    Finally, how about cutting Government salaries – Federal, State, County and City employees – which is what a private businesses do everyday when times get tough. Haven’t heard a word about that.

    Raising our taxes at any level of income is the last thing that should be considering. It is simply “kicking the can down the road”.

    What am I missing?

  • Jim  On February 10, 2009 at 12:14 pm

    P.S.: I was hoping you would comment on the post I made the other day regarding E. J. Dionne’s criticism of Jon Kyl. Do you agree with Dionne?

  • Curt  On February 10, 2009 at 4:28 pm

    I think it’s a mistake to expect government to operate by the same standards as business… they are two different worlds, with different goals, different incentives, etc. (That said, of course I’m in favor of government running as efficiently as possible – but that’s actually kind of hard to define).

    As Thomas Sowell put it: “Human beings are going to make mistakes, whether in the market or in the government. The difference is that survival in the market requires recognizing mistakes and changing course before you go bankrupt. But survival in politics requires denying mistakes and sticking with the policies you advocated, while blaming others for the bad results.” (I’m not quite as cynical as he is about politics, but I think the distinction he makes is very real).

    In business, it’s clear that the goal is making a profit, and the incentives and everything else can be structured around that goal. The values tend toward innovation, efficiency, competition. The rules of the game say that if you go bankrupt, the game’s over.

    But with government, the goals are often not nearly so clear, and the incentives certainly aren’t high salaries or bonuses (after a political career is another story!). The values inside government tend more toward tradition, hierarchy, shows of power, etc. If you try to impose business-type incentives in government, it can easily backfire… given that many government functions are not about ‘producing’ but instead about enforcing, guarding, assessing – how do you measure productivity? Is a policeman more productive if he writes more speeding tickets? Is an army more productive if it shoots more bullets?

    As I said before, I don’t believe this is a time for tax raises, but I also don’t think that tax cuts can be the only strategy. To take a concrete example of the recent past… When Bush came into office, he decided on tax cuts, in part because of a surplus, in part as a stimulus. We declare a war on Afghanistan, then a pre-emptive war on Iraq. At no time was there a move to pay for these wars, even as the economy seemed to improve. But I wasn’t aware of much effort to try to streamline government either… how does all that add up?

    At the moment I actually think this stimulus will turn out to unfortunately be small change compared to the money poured into fixing the financial system… but when the financial system is at risk, you kind of have to fix it one way or another. I’m worried that we’re going to get the worst of both worlds, where we pour tons of money into it and still don’t fix the problem, leaving the economy in pretty bad shape. I hope I’m wrong.

  • Jim  On February 11, 2009 at 9:35 am

    E. J. Dionne?

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