In one of the more ironic interviews in recent memory, Alec
Baldwin last week told local cable news host Dominic Carter that
Governor David Paterson should keep the current tax incentives
for film and television companies that set up shop in New York.
“I’m telling you right now,” the actor warned, “if these tax
breaks are not reinstated into the budget, film production in
this town is going to collapse, and television production is
going to collapse, and it’s all going to go to California.”
Currently, film and TV companies get a 30% tax break on
production costs for shows shot in New York. Baldwin’s point was
that if you take away that incentive — in effect, if you raise
the tax rates on these companies — you’re going to wind up with
less actual tax revenues coming into the state’s coffers. A lower
percentage of something is still more than a higher
percentage of nothing.
What the uber-liberal Baldwin has lately wrapped his mind around
is the message conservative economists have preached for decades:
Hiking the government’s cut of taxpayers’ earnings doesn’t
necessarily mean hiking the total tax dollars the government is
taking in.
It’s an idea everyone understands, intuitively. Once you start
tinkering with tax rates — and this goes for any kind of tax —
you run the risk of affecting people’s behavior. Suppose, for
example, New York Mayor Michael Bloomberg and the City Council
decided to address the city’s dire budget deficit by raising the
sales tax on goods and services purchased in the five boroughs
from the present 8.35% to 99%. Sounds logical, on paper. Think of
all the extra money the city would rake in!
Except we all know what would happen. Consumers would immediately
stop buying stuff in the city. They’d shop in New Jersey or Long
Island or Westchester County instead. Raising the sales tax from
8% to 99% would more likely bankrupt the city than close its
budget shortfall. On the other hand, if you raised the sales tax
to 9%, you probably wouldn’t affect people’s behavior very much
— and you might well wind up with greater revenue. But when it
comes to tax increases, there’s always a point of (literally)
diminishing returns.
If Baldwin has had his moment of clarity, we can only hope that
President Obama will soon follow suit— since the relationship
between tax rates and tax revenues seems to be a
genuine intellectual blind spot for him. During an April
2008 presidential debate, moderator Charlie Gibson pointed out to
candidate Obama — who had proposed raising the tax rate on
capital gains from 15% to as high as 28% — that when the capital
gains tax rate had been raised, during the 1980s, the
government collected less money, and when it had been
lowered, first by Bill Clinton and then George W. Bush,
the government collected more money. Obama’s response?
“I would look at raising the capital gains tax for purposes of
fairness.”
Cutting off your nose to spite your face may, under certain
circumstances, be fair. But it’s always foolish.
