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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.