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Phil Mickelson, Taxes, and the Laffer Curve

At what point does raising top marginal tax rates lose more tax revenue than it takes in? Where is the peak of the Laffer curve? Pro golfer Phil Mickelson thinks he has a pretty good idea:

“I’m not sure what exactly, you know, I’m going to do yet,” Mickelson said. “I’ll probably talk about it more in depth next week.  … There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now.”

In November, California voters approved Proposition 30, the first statewide tax increase since 2004. Mickelson lives in Rancho Santa Fe.

“If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said.

Mickelson has since offered a weird apology for talking about his personal finances. But anyway, the question remains a relevant one. The US has just raised top tax rates, and many left-of-center economists think we can and should go further. Some want to take top rates back to 70%, where they were before the Reagan tax cuts – if not higher.

But studies suggesting much higher tax rates are no big deal make several mistakes, as a recent AEI paper points out. Among them:

1. They assume high-income taxpayers react to tax hikes more or less like lower-income taxpayers, meaning not so much. But wealthier taxpayers — whether its Mickelson or French fim star Gerard Depardieu – have a greater ability to alter how much they work, to determine in what form they get their income, and to fashion tax- avoidance strategies.

2.  They assume sharply raising tax rates have zero long-term impact on taxpayer behavior and the economy just because those effects are hard to measure. But economists agree those long-term effects are important. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. In fact, the Laffer curve only really suggests short-term impacts of tax hikes.

3.  They assume government should maximize the revenue it collects from high earners since they value each additional dollar of income less than lower-income earners. But is that value judgement a universal one? Do most Americans think it’s generally OK for government to take more than half your income? Remember what AEI economist Michael Strain said on our recent “Money & Politics podcast about tax rates and the peak of the Laffer curve:

If you told me it was 65% [including state income taxes and payroll taxes], I would find that believable. … But when deciding what the top tax rate should be in the real world, it’s not as simple as just saying “Where’s the Laffer curve peak?” You want to take into account those long-run effects, and that’s going to argue for a tax rate that is lower than the peak in the Laffer curve.

And you want to ask yourself questions of justice and fairness and what sort of society we want. Is it ever just for a person to work for an hour and have half of the fruits of that labor being given to the government? Now you can imagine a situation where it is. So if you have a country where there are a lot of people who are starving, then maybe you want to take half of the millionth dollar of income from a millionaire and give it to feed these people.

And you can imagine where it’s not, where that tax revenue isn’t spent on the poor but is instead largely spent on the middle class. And that defines where the United States is. Most of our tax revenue goes to our middle class entitlement programs, and that is only going to be more true in the future. In the US, the reality is that we spend a lot of money on middle class seniors, and a lot of money gets wasted. And a lot of money goes to crony capitalism.

Poor Phil Mickelson. He hit a hole-in-one and didn’t even realize it.

  1. Brian Clendinen

    From what I can remember of studies that have looked at this, in the short-run the peak of the Laffer Curve for the upper third of income earners should be close to 30%. If you take top 5%, I think the peak is in the mid to upper thirties, that is about were it was a few years ago.

  2. SunnyOptimism

    Not to worry. Phil was shamed into retracting what he said. Even though he was speaking the truth, rich people aren’t allowed to say so. He’s “super rich” so he just needs to just shut up and take it.

  3. Chris Campion

    My guess is that Phil got the call from the agent, who got the call from his sponsors.  That’s what really changes behavior – when it impacts income.

    Ironic, since Phil was talking about exactly that.  He’d simply have less income to tax if he kept voicing his real feelings.  Not sure why he lives in CA when Florida is home to a lot of his fellow PGA tour comrades, and there’s kind of a different tax thing going on in Florida compared to CA.

  4. Jim  Ixtian

    I’m disappointed in Phil. He could have made a really salient point by defending his position to move out of California. The act by itself would have demonstrated an important point; that capital and labor is mobile. Now more than ever.  The real question that ought to be asked by politicians(but won’t be) is how do states and countries attract that capital and labor? 

  5. John Walker

    The Laffer curve is tautologically true in the sense that at the limits, government revenue is zero, and hence there must be a point between them at which it is maximised.

    But it seems to me, as an engineer, that you need to look at the derivatives.  How many people will scale back their earnings (and hence taxes) as they see tax rates rising?  How many businesses will not be formed because the founders anticipate confiscatory taxation?  What is the foregone revenue, not just to the state, but also to employees of enterprises never launched because “it just isn’t worth it”.

    It’s these rates of change (d/dt) which largely drive investment.  If I see disinvestment in an economy, as an investor I’ll be deterred in jumping in (except as a contrarian, assuming the majority are wrong).

  6. Muleskinner

    Lowering marginal tax rates led to more heavyweight boxing championships, why would golf be any different?

    “[T]he IRS …  was also effectively stepping into the prize ring itself and determining the way the sport was conducted. The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.”

  7. Don Tillman

    It’s interesting to note that Obama’s very own Chair of Economic Advisers, Christina Romer, recently published a paper concluding that:

    “Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.” 

    Romer and Romer: The Macroeconomic Effects of Tax Changes,  Estimates Based on a New Measure of Fiscal Shocks 

  8. Charles Allen

    Dang.  He capitulated quicker than a member of the GOP House leadership…

    After posting on his original statement yesterday, I was very disappointed to see he revision today.

    “Finances and taxes are a personal matter, and I should not have made my opinions on them public,” Mickelson said in a statement released late Monday night. “I apologize to those I have upset or insulted, and assure you I intend to not let it happen again.”

    First off…BS.  Even in California an individual still has rights under the First Amendment.  Even if taxes were a truly ”personal matter”, one would still have the right to makes one’s opinion public.  I am not sure how one can “insult” another person by stating that you think your state’s tax environment is untenable.  Millions in his home state have already done so…

  9. LowcountryJoe

    Teaching tool? Republicans have been the ‘tools’; we spend too much political capital getting tax cuts. And for what? To cave on entitlements and other reckless spending bills so that now we’re spending$3.5 trillion a year? Save your justification and please acknowledge that I may have made a decent point!

  10. Pats Fan

    I must say that I am pretty disappointed in Phil.  He spoke the truth and then I assume that he heard from the PGA tour and sponsors most likely through his agent.  He should have told them to go to hell and put his house on the market and started looking for property in TX or FL.  Phil is one of the 3 most popular golfers in the world and I find it pretty unlikely that he would have lost any endorsements.  Guess who watches golf?  Middle aged white guys who are sick of paying the bills for people who are unwilling to support themselves.  Phil has some pretty big cojones on the golf course, it’s time those translate to the real world.

  11. Larry Koler
    Don Tillman: It’s interesting to note that Obama’s very own Chair of Economic Advisers, Christina Romer, recently published a paper concluding that:

    “Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.” 

    Romer and Romer: The Macroeconomic Effects of Tax Changes,  Estimates Based on a New Measure of Fiscal Shocks 

    It’s also interesting to note that Obama doesn’t care about revenue — going up or going down. For him, taxes are a way of punishing the American dream — not just the individuals but he wants to damage the very idea of what it is to be American. He is — BY DEFINITION — anti-American.

  12. ctlaw

    What does this say about our wealth transfer society that the people who consume the high-end products of tournament sponsors and Mickelson’s endorsements are offended?

    The golf lifestyle is apparently something to be enjoyed by government employees and retirees while people working in the private sector have to slave away to support them.

    Chris Campion: My guess is that Phil got the call from the agent, who got the call from his sponsors.  That’s what really changes behavior – when it impacts income.

    Ironic, since Phil was talking about exactly that.  He’d simply have less income to tax if he kept voicing his real feelings.  Not sure why he lives in CA when Florida is home to a lot of his fellow PGA tour comrades, and there’s kind of a different tax thing going on in Florida compared to CA. · 1 hour ago

  13. 3rd angle projection

    Even more insidious is that Obama claims publicly that raising taxes is done out of “fairness” while admitting it won’t do anything to the debt and deficit. Huh? Gee, thanks to the almighty brainiac for deeming to be our president. Again.

    Phil, I can’t worked up over his need to apologise. That’s just political correctness at work. Yet one more thing that needs to be eliminated.

  14. Vance Richards

    Well, his nickname is “Lefty”

    SunnyOptimism: Not to worry. Phil was shamed into retracting what he said. Even though he was speaking the truth, rich people aren’t allowed to say so. He’s “super rich” so he just needs to just shut up and take it. · 3 hours ago

  15. Keith

    If every person has a “sweet spot” where the taxes will make them change their behavior or earning patterns, at best, the Laffer curve for even a small segment of the population would be an approximation, so why not ignore it and just say that taxation is theft, and work to shrink the Federal government down to a petty thief from its current grand larceny thievery writ large?

    Mickelson should move and tell the critics to kiss off.

  16. LowcountryJoe

    Why does anyone in this forum want to use the maximization of revenue to the federal government as a selling point to push for lower taxes? The starting point for any discussion from this point forward has to be lower tax rates to starve the beast. Period. And then stand firm and wait for the socialists to make the acknowledgement that Laffer has a point. Then and only then start negotiating from the new starting point.

  17. Larry Koler

    Keith and LC Joe, the Laffer Curve is mostly a teaching tool. It works well that way with everyone but leftists who really just want to follow through with their logic that the state is the only thing worthwhile and it — really now, let’s just admit it — owns everything. Not only didn’t you build it but you don’t own it, either.

    The idea of maximizing is to show rational people (as in, not leftists) how taxing can work against the ostensible aim of raising revenue. However, if the real aim is to change behavior then they should admit that up front and then we can still have a rational debate. But, people should be forced to confront what they really want here. 

    I certainly agree that the maximization issue needs to be the second part of the conversation — but first they have to learn how the real world works in terms of incentives and how stupid government can be by raising taxes in a counterproductive way regarding revenue. 

  18. paulebe

    This was dangerous ground for Phil. He’s a golfer and thus, not comfortable to political firestorms. He likely heard from his lefty benefactors, friends, news reporters, in a way he’s never heard before. He’s one of the “nice guys” that can’t likely withstand the kind of heat he got from, you know, being honest.

  19. Chris Campion

    It says a lot more about potential earnings impact concerns by the sponsors than it does about our wealth transfer society.

    No one wants the millions they’ve spent on branding getting tossed overboard because of a couple of statements from their poster boy.  Just a guess.

    ctlaw: What does this say about our wealth transfer society that the people who consume the high-end products of tournament sponsors and Mickelson’s endorsements are offended?

    The golf lifestyle is apparently something to be enjoyed by government employees and retirees while people working in the private sector have to slave away to support them.

    Chris Campion: My guess is that Phil got the call from the agent, who got the call from his sponsors.  That’s what really changes behavior – when it impacts income.

    Edited 9 hours ago9 hours ago
  20. ctlaw

    But the sponsors tend to be high-end brands/products. If they are worried about their consumers being offended, the questions are begged as to who those consumers are and why they are offended.

    Chris Campion: It says a lot more about potential earnings impact concerns by the sponsors than it does about our wealth transfer society.

    No one wants the millions they’ve spent on branding getting tossed overboard because of a couple of statements from their poster boy.  Just a guess.

    ctlaw: What does this say about our wealth transfer society that the people who consume the high-end products of tournament sponsors and Mickelson’s endorsements are offended?

    The golf lifestyle is apparently something to be enjoyed by government employees and retirees while people working in the private sector have to slave away to support them.

    Chris Campion: My guess is that Phil got the call from the agent, who got the call from his sponsors.  That’s what really changes behavior – when it impacts income.

    Edited 9 hours ago

    9 hours ago

    16 hours ago

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