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.