Disincentive to Produce

From time to time I have guest bloggers on my blog.  Here is one story about how the tax codes induce people not to produce.  America is spending a lot of time talking about extension of the Bush tax cuts.  Well, don’t forget about AMT.  It was instituted in the 1970’s to get rich people.  Here is a true story.  No one here is greedy.  Just trying to do the best that they can:

“Just got off a call from our accountant. My industry has had its ups and downs over the past couple of years. My pay has fluctuated.

My husband and I are “typical middle class Americans”. We both have master’s degrees and are relatively successful in our careers. We are both salaried employees and work long hours, averaging 55‐60 hr/wk in a good week. We have 2 kids, a dog, 2 cars and a white picket fence. We live within our means, save in our 401K, donate to our favorite charities and go on vacation once a year. Nothing exciting, nothing fancy, we are just a “living the American Dream”. To be clear, we are by no means, what Obama would refer to as “the rich”. Though, we would certainly like to be one day!

So back to the call from the accountant. Along with everyone else, 2009 was a very rough year and I took a substantial pay cut. But, what are you going to do? My choice was to lose my job or take a paycut. We live within our means, so we just tightened our belt a little bit, took a deep breath and moved on. This situation is not unique, many other Americans made the same choice.

This year, 2010, my industry appeared to be doing better. The company reinstated our salaries and, it looked like I may even get a bonus. Plus, I received a promotion. My base salary increased 33% from last year, including the reinstatement of our pay cuts. Sounds great, right? Well, the accountant called to inform us that we crossed some sort of threshold and due to AMT, the additional taxes we have to pay this year will take 40‐50% of the 33% increase! Additionally, if I get my bonus, we will cross another dreaded line and the percentage they take is even greater!

So, here I sit, at age 41, very seriously considering whether working is really worth it? I could continue to work and I would continue to get promoted. But, with each promotion, I work more hours and travel more. In my industry, as with most, the higher up you move on the corporate ladder, the more you work. The salary increases along way justify the loss in “family/personal time”.

The American Dream is to be successful. The old saying goes, “You can never be too rich or too thin”! But, with each extra dollar I earn, the government is going to take 50% (or more) of it. Is it really worth it? Come on, I’m never going to be a millionaire. For me, having more money means being able to go on a “flying” vacation as opposed to driving to Florida to visit my folks. It means going out to eat at someplace nicer than Chili’s once a week, buying slightly nicer clothes and maybe a new car every 5 years or so. We aren’t buying a second home in the Hampton’s.

Realistically, I could choose not to pay my mortgage and live in my house for at least a year (more if I can get creative about it). I live in a state where I can actually quit my job AND collect unemployment for 2 full years. Here is the math. If I collect unemployment and my husband stays employed, we can continue to live “fine”. We’ll be paycheck to paycheck and won’t have any disposable income but I would have oodles of time. I could volunteer at the kid’s school, scrapbook, exercise every day and watch Oprah.

When people like me seriously question whether or not to work, there is something very very wrong with our tax system.”

No doubt. There is something very seriously wrong with our tax system. Democrats don’t want to extend the tax cuts in a time of economic stress. They also have had two years to fix the Alternative Minimum Tax which is snaring more and more regular middle class people.

These taxes are devastating to someone trying to honestly build wealth and provide for their children. The mucky mucks in power don’t see it that way. “Spread the wealth around”, they say. “Shouldn’t you stop working once you’ve made enough?”, they ask.

Value judgements are being made by the mucky mucks in DC. Well how about this value judgement. Two people earned their masters degrees, are gainfully employed, haven’t defaulted on their house, and are questioning whether they want to work or not?!!

Luck didn’t get them there. Hard work did.

It’s really easy for bureaucrats and politicians. They are guaranteed a lifestyle.

Tip of the hat to Instapundit.com, welcome to his readers.
Welcome Charleston Tea Party Readers.
Thanks for the link Classical Values!

Greg Mankiw had an article laying this same situation out with real numbers, his own income, in the NY Times today(10/11/10).

  • Claire

    Your point is well taken, I think the Bush tax-cuts should be extended, and I can see why this woman may be considering her options…..BUT, if the people in your example have a mortgage, 2 kids, etc., and the wife can even consider not working, they may be in an economic pinch, but they are not suffering very much.

    • Sign me up for the effort and cost required to get an MBA while working full time. Sign me up for the additional hours at work, wasting what’s left of my youth until I can retire at a means tested age of 75. I have to travel more? Oh, bring it on! I love the hours of non-compensated time spent in a crowded, smelly airplane, soon followed by more hours stuck in a conference room and a hotel. So much nicer than dinner at home with the kids.

      Sign me up for all of that so I can revel in the comfort of knowing I’m “not suffering very much.”

      Yes, that’s apparently the new reality for the economic producer, the self-sufficient, the American mule, tethered and struggling to pull the rest of the country along.

      The sparkling new American Dream: to not suffer very much.

    • Seems to me you’re looking at it wrong, Claire. It’s not that they’re not suffering – it’s that by crossing an arbitrary line the family enters a confiscatory tax scheme which will penalize the heck out of their endeavors. They’ve worked hard, built their business – and they get screwed when the government goes “Oh, you’ve got MONEY! Fork it over, and nothin’ bad’s gonna happen.”

      And the slice the government wants continually grows. When the folks making things go “Screw this, why should I even bother?” then something needs to change.

    • Seems to me you’re looking at it wrong, Claire. It’s not that they’re not suffering – it’s that by crossing an arbitrary line the family enters a confiscatory tax scheme which will penalize the heck out of their endeavors. They’ve worked hard, built their business – and they get screwed when the government goes “Oh, you’ve got MONEY! Fork it over, and nothin’ bad’s gonna happen.”

      And the slice the government wants continually grows. When the folks making things go “Screw this, why should I even bother?” then something needs to change.

    • Claire,

      You are missing the point. It is not whether the women in article will be hurt. As she said, they won’t. It is the REST OF US who will be hurt because these people don’t show up to work.

      For some reason, most people can only see this issue in terms of relative wealth when they should be thinking in terms of the real work that people do. We need other people to work so they can do things for us. We need doctors, farmers, engineers and managers to show up everyday and make the goods and deliver the services we need. With that real work, the rest of us are materially poor regardless of how poor we are relative to each other.

      We have a good economy when people are working and doing things. End of discussion. These kind of tax policies create what might be called anti-overtime. In regular overtime, if you work additional hours you get paid more per hour of overtime. We do this because it is harder to work the 9th hour of a day than it is to work the 1st. These tax policies, however, do just the reverse. They make people’s pay for the 9th hour of the day or the 50th hour of the week far, far less than 1st hour of the day or the 40th hour of the week. People rationally choose not work those extra hours.

      It is strange to me that people think it obvious that ordinary workers should be expected to paid extra per hour for working longer hours but they think that skilled professionals will work longer hours for less per hour.

  • Number Six

    It’s called a marginal rate of return or diminishing returns. Increasing tax rates punish you for doing more. That’s why the middle class is being squeezed back into the working class.

    I have looked at the cost-benefits of working more and decided it’s not worth it. I’m a fifty-something single white male, I have a Master’s degree, worked in management and went back to school at night to get an Associate’s degree with specialized certificates. Been with the same employer for ten years and I’ve turned down opportunities for advancement. I don’t want to be promoted into Supervisor again. It’s a lot more work, a lot more trouble for a trivial amount of money. The additional $10,000 or $12,000 a year would end up being less than half that after taxes and cost me an additional 10 or 12 hours a week. Getting a promotion would actually reduce my hourly compensation after taxes. So I put in my 45 hours a week, stand back and let the promotions go to people who are less competent, or more desperate.

  • Anonymous

    “It’s really easy for bureaucrats and politicians. They are guaranteed a lifestyle.”

    That’s precisely why there should be term limits for both. Nobody should work in government at any level (excluding the military, of course) for more than ten years, 12 tops.

  • Prior to Sweden’s reforms back in the 90s they faced a similar problem. A combination of a high minimum wage and high marginal taxes began to make many highly productive Swedes cut back on working. The problem was best summed up by a Doctor who decided to take off work for two weeks to paint his house. Why? Because it was more cost effective for him to do the work himself than to work those two weeks and pay a painter. So, Sweden lost two weeks of highly productive medical work and a house painter didn’t work for two week. Multiple that over the millions of people making similar decisions for the same reasons and you end up with a massive destruction of wealth.

  • Anonymous

    This is just the first group to “get the message” that it doesn’t pay to work that hard. Combine this confiscatory tax structure with the money printing going on in Washington (“Quantitative Easing”) and we’ll very quickly arrive at the East German worker’s utopia:

    We lied about working.
    They lied about paying us.

  • Hopelessly Changeable

    I was laid off from my job a few years ago but found work as a private contractor. But, thanks to the self-employment tax (i.e. the employer’s half of social security that self-employed people have to pay) plus the normal state and local income taxes, I get to keep about 50 cents of each dollar I make. So, I work minimaly – It ain’t worth the effort for me to find more work! And in a couple of years when I’ve eligible for SS (assuming it hasn’t gone broke by then) I’m going to punt work and take it. Screw the politicians.

  • DoctorofEducation

    There is no doubt honest, capable, and employed people are being driven to depend only on the government for their income. The writer of her situation is correct. Why work when Obama, Pelosi and Reid want to provide you with someone else’s money.In my case my Medicare Insurance rate has already increase. I earned my Medicare Insurance where those the the Jimmy Carter administration that are 65 or older get completely free Medicare Insurance without paying one penny into the Medicare fund. Medicare has changed their provider policy to charge me more for an insulin pump. In the before Obama, Pelosi, Reid years, my pump’s lease was paid for over a 4 year period at no cost to me. This included a replacement pump if mine went bad.Today, Medtronic Minimed notified me I now get one year Medicare coverage for up to 13 months. All other expenses for my pump I must pay. I guess this is the way Obama, Pelosi, Ried want us that are 75 years of older to share our savings with those who either don’t want to work or save money or are illegal get what we spend 45 years saving from our earnings.My secondary medical insurance carrier has also increased something over 20% since the Obama,Pelosi, Reid and Democrate machine torched those of us 75 years and older. We’ve learned that Democrats like Woodrow Wilson, Franklin Roosevelt, Barach Hussein Obamapreach out of the side of their mouth as do Democrats that are elected as public service to treatall U.S. citizens with good common good representation. Instead, we get half-truths in Democratcampaign promises or more the opposite from what they lied on the campaign trail to gain ourvote. We do not need all the federal or state employees on the public dole. Every state ought to be responsible for their medical care as well as their own school systems. The money sent to Washington D.C. in the form of tax payments collected ought to be returned at least 90% to the state that sent in the money. This would take the federal government out of making “cookie cutter” educational decisions and one thing for all must be met to get the state dollars and individual dollars raked in by high spending U.S. Senators and U.S Representatives. These million dollar kind ofpeople print money for the wrong reasons and now have generated trillions of dollars to our national debt. Thank goodness we have the opportunity to go back to the way our U.S. Constitution originally intended.

    • Republicans have had their chances at bat too. However, it seems like because of the tea party, this new cadre of Republican leaders (Ryan, Cantor, Roskam) have gotten religion.

      Don Manzullo has been very forceful in his speeches on reducing government spending. If they get put into office by a landslide, we will see.

    • Republicans have had their chances at bat too. However, it seems like because of the tea party, this new cadre of Republican leaders (Ryan, Cantor, Roskam) have gotten religion.

      Don Manzullo has been very forceful in his speeches on reducing government spending. If they get put into office by a landslide, we will see.

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  • Anonymous

    Same story here except I’m living the dream. Got laid off and life has never been better. We weren’t rich to start with and have little in the way of retirement savings ($50k) but the way things are going, I figure they’d just find a way to steal anything above a subsistence retirement anyway once this house of cards comes tumbling down in 20 years or so. Maybe we’ll retire in Mexico or something.

    Anyway, the wife makes enough to keep us afloat. I receive half my former earnings as unemployment compensation. We don’t vacation a lot; I drive a 1997 Tercel, she drives a 2005 Sienna. We have enough to have a decent middle class lifestyle, our kids want for nothing.

    But they way I see it, if Obama is determined to “spread the wealth”, for once in my life, it’s gonna get spread in my direction. So I stay home, shop, cook, do home improvements and landscaping, spend a lot of time with my children. Life has never been better.

    As an aside, you 1970s womens libbers were nuts. Shouting and screaming about making your way into the workforce. lol Are you nuts? You can have it! I’ll stay home, cook and coach my son’s baseball team anyday. You can have my spot in cubicle world.

  • Anonymous

    I’d like to also add that I took a look at what my taxes were getting me and decided it was a bad deal. So now I don’t earn them and the government doesn’t get them. FICA taxes? Please, can you name a worse investment than Social Security?

    And why should I just continue to pay income taxes so that government union employees can receive bloated pensions and earlier retirement ages? The unions are taking the American people for a ride, the harder *you* work, the more *they* benefit. I’m getting off that merry-go-round.

    When my unemployment ends we will be exploring ways to cut spending so that I can remain home with the kids and feathering the nest. My wife likes her work and is happy to have me take over most of the day to day domestic stuff. The “consumer economy” will suffer as we pull back discretionary spending but our lifestyle will be much better.

    Ironicallly, Obama has taught me that if I don’t generate “wealth”, there’s nothing for him to “spread”. They can’t steal what I don’t earn.

  • Ralph

    In 2007 I was laid off in early May. I received nearly a year’s pay in severance and unused vacation, plus I had to sell my remaining stock options, gaining me about another 3 times my base salary. Got reamed on taxes. I looked at my options at the time, and decided I would be nuts to go back to work and have Uncle Sam and the State of California take more than half of what I would make. I didn’t even bother looking for employment until the end of the year. When I finally started looking for employment I didn’t bother looking within California, quickly found a great match for me, and left the state.

  • Bjh

    No! They don’t want you to STOP working when you’ve made “enough”, they live in a delusional world where, once you’ve made “enough”, you actually keep working and let them take all the extra that you don’t need. Unless you’re a rich technocrat elitist and your needs extend to yachts and family compounds and private schools, in which case you get a pass, because after all, you’re part of the smart set, you run things and the rules don’t apply to you, just the little people.
    My husband and I are in the same boat. With 3 small kids and 2 very demanding and high-paying jobs, childcare alone eats half my take home pay. And we live in Northern VA, where half a million dollars can gets you a nice 60 year-old 1200 square foot tear-down with an hour commute. We can manage the mortgage AND childcare, but once we hit $250K, since we’re rich, we get screwed. If the so-called “Bush tax cuts” are allowed to lapse, I’ll leave my job, b/c i will literally be working for about $6/hour. And the stress of my job and the travel and being away from my kids isn’t worth $6/hour. Am I fortunate that I am in a position to tell the gov’t to go steal from someone else? Yep. But how screwed up is your tax policy when you are discouraging a professional and successful PhD from working? We aren’t all dopes, ya know. I’m not going to work for free. And no country in the world has ever been able to tax it’s way to prosperity. When you take away someones incentive to work…wait for it….they STOP WORKING! Who’d a thunk it?