Lying to Ourselves: a New Marketplace Podcast

Our latest Freakonomics Radio on Marketplace podcast is called “Lying to Ourselves.” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.) 

The episode was inspired by a recent poll I saw on Yahoo! Finance:

Does anyone believe for a minute that this many people would actually leave the U.S. if taxes (whatever that means, exactly) were to rise to 40 percent or even 70 percent?

Yes, there is a Laffer Curve out there, somewhere. But how much are we to believe surveys like this one, or this one or this one? Remember all those people who said they’d move to Canada if George W. Bush were re-elected?

The fact is that we’ve come to rely on polls and surveys to tell us how people will behave in the future. Too bad they are almost completely unreliable!

In this episode, you’ll hear from Steve Levitt, who tells us how he’d respond to a big tax hike; Joel Weichsel from the American Automobile Association, which constantly polls people about how their driving behavior will change based on gas prices; and FiveThirtyEight.com‘s Nate Silver (author of the recent The Signal and the Noise: Why So Many Predictions Fail — But Some Don’t), talking about the reliability (or not) of election polls.


Badger

Your body may not leave the country, but your wealth leaves. Under this perspective, the 35% response for "I'd never leave" is way too high.

Michael

I think the issue is income, not wealth, specifically labor income. If your body stays in the US, your labor income is going to get taxed in the US (heck even if you leave it may still be). Moving it out of the country after it's been taxed misses the point.

Crunchyfrog

I wonder if any of these people realize how hard it is to find a country willing to accept you and how much of the taxes that they're "saving" will be spent on the bureaucratic hoops to get the paperwork allowing them to permanently reside there. And that doesn't include being allowed to work; most countries will require that you show that you're sufficiently wealthy to live without working or relying on their social welfare system before you'll be given residency, or employers will have to prove that there are no citizens capable of doing a job before you can be hired.

James

That's a good point about finding a country willing to accept you. The problem here (and with many of the other "lying to themselves" questions") is that people are really responding to an unstated larger question, e.g. "Would you leave the US if there was a pleasant country with lower taxes that would let you move there, and you could pack up family, dogs, &c with no hassle?"

As for the moving question, I've met quite a few people who've moved from California to Nevada to avoid state income taxes.

tmeier

I've already responded to the tax/regulatory environment. I used to have a business, employing 10 people at good wages. It was profitable but in proportion to the hassle and worry not worth it to me so now I run one man operation making almost as much. The losers are the people I employed and the society which lost economically.

If taxes in this country went the way of France I would definitely vote with my feet but I'm admittedly in an unusual situation.

Jake

Beyond that, it shows that people really don't know what their tax rates currently are. If you look at the tax brackets, federal tax is currently at 35% for the highest bracket. But, that is not the only tax we have. Add in another 6.2% for Social Security tax, and 1.45% for medicare, and double it to include the employer contribution, and you get another 15.3% on top of the base federal tax for a rate of 50.3%. Once you factor for state and local taxes, which typically add another 10% or so, you are up to a 60% rate.

Some of you might be saying, that's only the marginal rate for people with high income. That's true, but lets see what happens using a more normal figure.

The median household income in 2011 was about $49,000. Using that figure, a household could be expected to pay $8375 in federal tax (assuming no deductions for simplicity), $7497 in FICA taxes (of which their employer may pay half), and around another $4900 in state/local taxes. This sums up for a total of 42.4% in taxes.

Why are the 32% of people who said they would leave if taxes got over 40% still here. Either they are lying to themselves, as the article suggests, or they aren't aware of how much they are really paying in taxes.

Read more...

Nylund

If you're going to include the employer contribution to the numerator, you have to add it to the denominator as well.

Here's a simple example.

Say I make $10 and pay $5 in taxes. Say my employer also pays $5 in taxes. There are two ways one could think of it:

1. I pay $5 of my $10, so my tax rate is 50%.

2. I pay $5, my employer pays $5, and I keep $5, so out of the $15, $10 are paid in taxes. That's a rate of 66.6%.

What you absolutely CANNOT do is claim that since I pay $5 and my employer pays $5 and my total income is $10, the tax rate is 100%. That's obviously BS since I end up with $5 after tax, not zero.

Yet, it's that last method you use when you calculate your rates.

Personally, I object to number 2 as well because it assumes that your employer would pass on any tax savings to the worker in the form of higher wages. Do you really think Walmart would give everyone a huge raise if the IRS got rid of that aspect of the payroll tax? If you think the answer is yes, you must be wearing some pretty rose-tinted glasses.

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km

I know this is beside the point, but leaving the country doesn't reduce your tax bill. You'd have to renounce citizenship.

Ben

I believe this is a situational hysteria thing. We are presently all ramped up on Presidential campaign hyperbole.

Truth is, we will wake up Nov. 7 with a President that isn't going to make major changes to the status quo, whoever wins. Accepting that defuses all the crazy.

JAM

I agree. I think in the short term many people have their emotions at the helm with respect to unpleasant propositions. In most cases, as time passes, the heavy lifting (opportunity costs) becomes apparent that needs to be done to support the emotional decree. The emotions get suppressed and extreme reactions turn to minor changes.

Michael

I actually did move to Canada after Bush was re-elected. In 2008, I came back (with a Canadian wife). Having Harper in charge up there made it easier to leave.

Kazzy

If I'm the richest man, what do I care? I'll make $300 million instead of $500 million? Shucks.

frankenduf

this is an empirical issue- taxes were @ 90% during the Eisenhower administration- look to the emigration rate to determine the answer

Joe

People don't respond to tax rates? Of course they do.

Look at the business drain from the tax expensive NE to the SE and particularly states like TX with no state income tax. Of course, moving states is much less dramatic than leaving the US, but people do respond.

I'm taking some unpaid time off before the end of the year. Why? I'm at a marginal federal rate of 30% until 2013. Working the extra hours just isn't worth it to me. Employer calls and says 'Can you work overtime?' My answer is No. It's not because I don't want to help out, it's because the tax hit makes it not worth my while. At that price, I'll take the time off.

Mike B

Oh boo hoo, you're just so unlucky to be making so much money that you have to pay the 30% marginal rate. Maybe you little act of purulence will encourage your workplace to hire additional employees.

My grandfather never complained about paying a 90% marginal tax rate in the 1950's because 50 cents of every tax dollar was going to national defense and he sure as hell wouldn't be making anything near as much money with the Russians in charge. Today the Russians aren't busting down our door, but high levels of income inequality are simply not sustainable and when poverty rates reach over 50% you and the other top 10% of income earners are going to see some changes far in excess of what is being proposed today...or start footing the bill for a mid-east style security apparatus.

Bobo

I think the 35% of people who say they would never leave are among the majority of Americans who have done little or no overseas travel. There are some amazing and beautiful places in this world. The United States is a nice place, but if it were to adopt confiscatory tax rates, many talented people would renounce and settle in one of the many other nice places in the world. The common retort of, "fine, let them renounce, but never let them visit the USA again!" would further exacerbate the problem, as the USA would be keeping talent and investment outside of the country, much like it does now by not allowing enough visas for talented foreign workers and entrepeneurs.

Mike B

Taxes were as high as 90% in the 1950's, 60's and 70's and I didn't see massive amounts of talented people leave then. BTW, what nice places are you talking about? Europe's tax rates are just as high if not higher and anywhere "developing" is a government whim away from complete and total nationalization of your wealth. I am sure there were more than a few wealthy ex-Pats living in Cuba in 1959 that thought they were getting a great deal in that country.