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Taxes in the real world

Posted By Russ Roberts On December 8, 2010 @ 4:59 pm In Taxes | Comments Disabled

A reader responds to this post [1] on the incentive effects of taxation:

In 2004, as a rural solo Iowa general surgeon, I made roughly $500K gross income. However, I then had to subtract:

$50K office expenses

$100K malpractice insurance

39.6% marginal Fed income tax

15.3% self-employed FICA & Medicare

9.98% Iowa income tax

and consider that I also had to pay

6% Iowa sales tax for items bought

$6K property tax

$1K medical license, organization fees, DEA license

Anyway, I figured that my marginal rate was >70% tax on what I was making, and my malpractice cost was headed for $144K.

As a non-economist, I very much felt as you said, “I do believe there are eventually incentive effects from raising marginal tax rates”, to the point that I quit medicine. I now teach, make ~$50K, but pay no Federal and little state income tax, given my family, and am quite clearly one of those who believes he had previously tried to live on the wrong side of the Laffer curve. The people who determine incentive effects are people like me. And now, given what the .gov is doing to health care, even in hindsight I feel I made the right decision. Although my gross income is 1/10 of what it used to be, my disposable income is at least 1/3 of what it used to be, and that’s sufficient.

I recall Greg Mankiw recently said much the same regarding taking on additional engagements – the extra income just wasn’t worth it. When your uncle’s name is Sam, you learn that life in a doghouse is preferable to life in a squirrel cage.

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