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See, Even Rush Limbaugh Understands Incentives…

April 7th, 2009 · 14 Comments
Econ 101 · Incentives

…and my goodness, if Rush Limbaugh can get it, there is hope for everyone else. (Sidenote: I really hope that that hyperlink was gratuitous and completely unneccessary, as I would think that my audience has not been living under a rock. I also find it funny that his Wikipedia page currently has the “The neutrality of this article is disputed” warning on it. Shocking.)

As an economist, I really do believe that money makes the world go ’round. I would even go so far as to say that in a lot of cases money can in fact buy happiness, since it’s really damn hard to be happy when you’re stressed about money all the time. (That’s the grad student in me speaking. I might also give a nod to Stephen Colbert on my Facebook profile where I list my religious views as “Moneytheism”.) So if you take the fact that money makes the world go ’round and add it to Economic Principle #4: People respond to incentives, it should not be surprising that Rush Limbaugh would say something like the following:

“Personal income taxes for the uhh…upper middle class and the rich are about to skyrocket 31 percent for all New Yorkers making more than $500,000 a year. So I’ll tell you what I’m gonna do, I’m gonna look for an alternative studio somewhere outside New York. I’ll sell my apartment, I’ll sell my condominium, I’m gonna get out of there totally because this is just absurd, and it’s ridiculous…”

So economists have two phrases that are relevant here: “vote with your dollars” and “vote with your feet”, and Rush is literally threatening to do some of each. If you think about it, there is a bit of a “consent of the governed” dilemma going on here, since those people who accept the higher taxes and don’t move, assuming that moving isn’t prohibitively costly, are implicitly accepting the new policy. So sure, why wouldn’t a government raise taxes if it didn’t have to suffer any negative repercussions?

In reality, the government doesn’t get a free pass with tax policy. If nothing else, the increase in taxes gives people a disincentive to work (there is disagreement on how large this effect is), and if people don’t work as much, the government doesn’t have as much of a base to tax from. This brings us to our friend the Laffer Curve:

So, up to a point, the increased tax rate more than compensates for people working less, but once you go beyond a certain point it’s a lose-lose situation. Now, if you added the possibility of people moving out of the jurisdiction altogether into the model, the tradeoff would be more in favor of the people (i.e. lower taxes, at least at a city or state level). Also, if people explcitly thought about their incentives, their decisions might be more in line with what Rush Limbaugh is suggesting. As a result, if governments actually thought that people were going to act like Rush Limbaugh is suggesting, then they might be more careful about the reactions to their policies.

Tags: Econ 101 · Incentives

14 responses so far ↓

  • 1 Frederick // Apr 7, 2009 at 2:56 am

    In California, where I live, they have raised the sales tax to 9% in Los Angeles county. In five years, you’ll see that the business climate has changed as more business’s move out of this state. I’ve been around too long to see this again.

  • 2 Pfloyd // Apr 7, 2009 at 7:19 am

    I’m glad I live in Nebraska if only for the fact that since we are required by state law to have a balanced budget it’s real hard to sneak things around and it makes the government much more at the mercy of the citizens. Property taxes are a little higher here, especially in Omaha, but at least I know that our state won’t suddenly go bankrupt one day like Kansas or California.

    Now if only the Federal government would take a cue from us.

  • 3 RK // Apr 7, 2009 at 9:53 am

    With rental prices falling with incentives like 1 month free, and selling prices down 30%, it’s a wash, especially when you factor in the extra commute time from outside the City and the lost opportunity cost. Time is money, and I really doubt Mr. Potato Head is going anywhere.

  • 4 econgirl // Apr 7, 2009 at 11:00 am

    Let me also refer you back to the old bar stool economics story, where the rich guy was going to take his ball and go home…doesn’t sound so farfetched now does it?

  • 5 The PULSE Review // Apr 8, 2009 at 10:30 am

    “So sure, why wouldn’t a government raise taxes if it didn’t have to suffer any negative repercussions?”

    Presumably, the next time people go to the voting stations, they’ll note some sort of causal relationship between who they elected last time, and the new tax raises. Well, one can only hope as much…

    As for leaving places with onerous regulations or taxes, the only reason I made it out of MA was due to college/military, and I’m somehow even considering moving back, largely due to some sort of perverse nostalgia for the ridiculous laws that went along with my boyhood.

  • 6 gtorell // Apr 10, 2009 at 3:59 am

    There are only two know points on the Laffer Curve. The rest of the shape is unknown, but it certainly isn’t parabolic.

  • 7 Steven Duerringer // Apr 10, 2009 at 10:08 am

    While the Laffer curve is a useful explanatory model in close-knit economic discussions of an academic nature, it has become a tool to obfuscate serious political discussions. Tax rates in this country are not now and will not in the near future, even under the Obama administration, reach comparable levels to most of our European neighbors. Using Laffer is useful for folks like Rush who wield the theory like a sword any time the left tries to initiate social programs at the expense of increases in marginal tax rates. Rush is lucky because a large proportion of our nation has no idea who Laffer is and what his theory implies about our economy. Systems of progressive taxation seek to minimize the Laffer effect by taking larger percentages from people who would be less burdened by those rates, and thus less likely to be discourage from working by the government taking $4 mil of their $10 mil in income this year.

    Interestingly enough, everyone wants to move TO California! And why? If your tax dollars get you valuable social services and inexpensive secondary education, you might just turn the Laffer curve on its head.

  • 8 Jeff Bailey // Apr 13, 2009 at 2:04 am

    It’s true that the Laffer curve is only something use to show a concept, and it’s not exact. And it’s true, that as far as our personal taxes go they may not be close to Europe. But, our corporate taxes are second to only one, and what has been happening, businesses have been exporting jobs to places with cheaper business costs. The Laffer curve is all too real and practical when it comes to American businesses and American jobs!

  • 9 Tim Cullen // Apr 16, 2009 at 4:57 pm

    How much money does the government waste though is the relevant question. We may not be anywhere near the maximum revenue point on the laffer curve, however why should government seek to maximize its’ revenues; it is instituted only to do certain jobs the market cannot provide or provide well and shouldn’t take any more than is necessary to do those jobs well. Before the government starts thinking about raising taxes on anyone, rich or otherwise, it ought cut wasteful pork, bureaucracy costs, and lavish public sector employee benefits. It’s one thing to raise taxes on the rich to pay for the healthcare of the poor who cannot afford it, another to do it to pay for a middle class entitlement to healthcare for those who can afford it based on a belief government can run healthcare better than the free market, and a third to do it to pay for white elephants like a Lawrence Welk museum, bear genetics research, or a study on why pigs stink.

    This is the problem, taxing the rich more just allows the government to avoid making the hard decisions to cut bad programs that have vocal constituencies by saying that only a minority of “greedy” people at the top will end up paying for them. When the government decides to stop funding BS and cuts out its fat I’ll entertain the notion of raising taxes on the rich to fund things like healthcare and education. We don’t need to starve the beast, but we also shouldn’t keep feeding it after it soils our floor and expect it to behave any differently.

    As for incentives, as long as the total marginal tax burden on those top earners doesn’t go too far above 40% I think that those people will still continue to produce, I’m more worried about corporate taxes, tax complexity, the explosion in federal spending, and a regulatory overreach beyond just regulating some of the practices that got us into this mess. It is also important to note the political incentives created by an overly progressive tax system where those on the bottom have little incentive to rein in waste as they do not pay for it and sometimes benefit.

  • 10 jon // Apr 29, 2009 at 6:04 am

    if obama keeps printing money ,all we will have is funny money,….honey

    rush limbaugh could figure this out without spending all that money at MIT and Haaaavad he must be smart

  • 11 Donnie // Mar 28, 2010 at 8:56 pm

    Laffer was wrong, they have lowered taxes, and the government lost tax money (accounting for the other factors).

    Laffer didn’t have a PhD, and the concept was already understood. The curve is trivial except for trying to convince people that we are past the peak.

  • 12 econgirl // Mar 28, 2010 at 11:55 pm

    Revenue going down when taxes are lowered is not necessarily inconsistent with the Laffer Curve, it could just mean, as you pointed out, that the economy is not past the peak on the curve.

  • 13 Jon Garfunkel // Mar 29, 2010 at 9:13 am

    There’s actually a real practical problem here, which Limbaugh discussed at the time (a year ago). Even though he moved to Florida in 1997, New York State has been auditing him for the last 12 years to recover any taxes he might have earned while in New York. No matter what one’s income level, one can sympathize with the burdenof being audited for what could be trivial amounts.

    That said, some portion of high-income earners have annually been leaving New York State for lower tax states. Perhaps *more* left in calendar year 2009… I expect that the numbers should start to materialize in few months as the tax forms are processed. So we can move from the theoretical Laffer curve to some practical data points.

    Are the state treasuries allowed to communicate with each other? If they presently don’t, that would incur greater costs of auditing…

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