Taxes Are Nothing More Than a Price Placed on Work
The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives.
—Adam Smith, The Wealth of Nations
In the music industry, there’s a pecking order that everyone understands. In Los Angeles, my hometown, the easiest way to measure musical success, other than consulting Billboard, is to look at the venues where various bands and singers perform in concert. Bands that are up and coming but still not well known might find themselves at the Whiskey A Go Go on Hollywood’s Sunset Strip. The next step has often been the Hollywood Palladium, with its five-thousand-person capacity, and the really successful groups play at the Staples Center downtown.
But for the biggest bands, even arenas the size of Staples can’t hold their legions of fans. Those bands play in stadiums, from the Rose Bowl in Pasadena to the Coliseum near downtown LA. The Rolling Stones are a stadium band, and the story of their staggering success can teach us something about taxation. Taxes are the price we charge people to work, and that price affects where they work and whether they work at all. As the Stones’ lead guitarist, Keith Richards, explained in his endlessly fascinating autobiography, Life, “The tax rate [in Britain] in the early ’70s on the highest earners was 83 percent, and that went up to 98 percent for investments and so-called unearned income. So that’s the same as being told to leave the country.”1
That statement is full of economic lessons. For one, raising the price of something doesn’t mean you’ll get that price. General Motors could increase the sticker price of its Chevy Malibu to one hundred thousand dollars, but its customers would laugh and go next door to the Ford dealership.
The same is true for taxes. Politicians may raise the cost of work for their citizens, but if the cost is too high, those citizens won’t stick around to be fleeced, especially if they’re well to do. Like the car shoppers, they’ll go elsewhere. Richards and the Rolling Stones did just that.
The last thing I think the powers that be expected when they hit us with super-tax is that we’d say fine, we’ll leave. We’ll be another one not paying tax to you. They just didn’t factor that in. It made us bigger than ever, and it produced Exile on Main St., which was maybe the best thing we did. They didn’t believe we’d be able to continue as we were if we didn’t live in England. And in all honesty, we were very doubtful too. We didn’t know if we would make it, but if we didn’t try, what would we do? Sit in England and they’d give us a penny out of every pound we earned? We had no desire to be closed down. And we upped and went to France.2
England’s political class perhaps grew a little arrogant in their belief that they could put any price on work they pleased. As it turned out, raising the cost of working to 83 percent meant the Inland Revenue Service collected 83 percent of nothing from the Rolling Stones.
Politicians try to justify high taxes by asserting that the top rates will affect only the highest earners, who can most afford them. They often complement this economic falsehood with the absurd argument that hiking taxes on the richest is all about fairness. It’s only fair, they say, for the highest earners to pay the lion’s share of taxes. The reality, unfortunately, is not so simple. Progressive taxation, in fact, is most unfair to middle- and lower-income taxpayers.
The Rolling Stones were not always the Rolling Stones. In the early 1960s, Richards recalls, “the poverty seemed constant, unmovable.”3 He writes, “I even kept accounts of the money we earned at gigs, the pounds, shillings and pence. Often it just said ‘0’ when we played at tiny end-of-term school dances.”4
Most people do not begin life on top. Politicians who raise income tax rates on top earners in the name of “fairness” are telling the strivers lower down that they will incur a penalty for succeeding. Those who are already rich can hire the best tax accountants to circumvent outlandish rates and can move, as the Stones eventually did.
Taxes are not only a price on work. They are also a price on the productive use of wealth. Great Britain’s political leaders in the 1970s apparently forgot what goes into producing a record album. The Rolling Stones needed sound engineers, backup instrumentalists and singers, gofers and personal assistants, not to mention catering companies, drivers, public relations specialists, and many others who achieve employment when the rich deploy their capital. High tax rates gave all those jobs to the French and later, when post-production of Exile on Main St. moved to Los Angeles, to the Americans. The rich are highly mobile, and they will put their capital to work in the most favorable environment. When the government hits them with high taxes, it’s the non-rich who feel the most pain.
You could be excused if you thought that people in the movie business want to pay more taxes. Hollywood is near monolithic in its left-wing politics, and its leading lights fund and campaign for the politicians who promise to raise their income taxes the most. Yet moviemakers are actually quite adept at finding low-tax havens in which to practice their craft. The Academy Award–winning director, writer, and actor Ben Affleck is an unabashed liberal, but here is what he told the Los Angeles Times in late 2013 about why he was going to Georgia to shoot Live by Night:
You just follow the money. What happens is that you’re faced with a situation of shooting somewhere you want to shoot, versus shooting somewhere you’d less rather shoot—and you get an extra three weeks of filming. It comes down to the fact that you have x amount of money to make your movie in a business where margins are really thin.5
Affleck is not alone in seeking tax advantages before rolling the camera. Chris Moore, the producer of the American Pie franchise, summarized matters neatly for the Los Angeles Times: “If you have a $100 million Brad Pitt movie, you just call 15 different film offices, and you’re going to have the governor calling you at home saying, ‘Hey, man, here’s why you should do it in Iowa.’”6
Actor Rob Lowe talked about the large crews required to make films in his 2011 autobiography, Stories I Only Tell My Friends. In it Lowe recalled that:
It takes an army to make a movie. Camera crews, lighting crews, wardrobe crews, makeup crews, hair crews, painters, builders (called grips), a crew to provide the props, a crew to provide the furnishings (the art department), electricians, special-effects people, stunt performers, stand-ins, the accountant, scheduling and finance (called the unit production manager), catering and someone to provide snacks and drinks (called craft service), and the team of walkie-talkie-armed Gestapo that police the second-by-second momentum of shooting: the assistant director staff.7
California, the longtime home of the film business, is run by politicians who are eager to reach into the pockets of its most productive industries. Though many of the industry’s best and brightest choose to live and work in California, they often make their movies outside the Golden State. The Los Angeles Times reports that the “number of top-grossing films shot in California has plummeted 60% in the last 15 years.”8 The alarming part of this story is how non-rich Californians suffer from the state’s aggressive taxation of some of its highest earners.
The Times goes on, “Hollywood’s trade workers—the electricians, carpenters, caterers and others who work behind the scenes—have long complained that they’ve lost their livelihoods as states vie for film business with ever-richer incentives.”9
Wealthy filmmakers, like top-earning bands, have the mobility to avoid the tax rates meant for them. Not the lower earners, who suffer the consequences of the naïve effort to soak the rich.
As a matter of fact, those with less are better off when the rich keep more of their income. Does that seem counterintuitive? Consider Uber, the popular car service that’s a substitute for traditional taxis. A tap on your smartphone’s Uber app tells you instantly how many cars are nearby and how long you’ll have to wait for one. Another tap dispatches an SUV, a black town car, or a cab ready to whisk you to your destination. The fare and tip are automatically charged to your credit card. No frantic hunt for an available taxi, no fumbling for cash or calculating a tip.
City dwellers might shrug their shoulders—they can walk outside and find plenty of cabs. But if you live in the suburbs or a smaller city, Uber is a dream come true. Before Uber, you had to call a cab company and deal with a surly dispatcher, who was often vague about when your taxi would arrive, if it arrived at all. Not with Uber.
It is often said that capitalism is colorblind. Cabdrivers have been known to pass by black customers eager to hail a taxi, but Uber drivers show up without regard to race. Even better, drivers and customers can rate one another. If your ride is unsatisfactory—the car’s a mess, the driver doesn’t run the air conditioning on a hot day, the radio’s too loud—you can give the driver a low rating. Too many poor ratings bring about the driver’s dismissal by Uber.10
By the same token, a passenger who is habitually rude to drivers, makes a mess of the car, throws up, or is unreasonably demanding can receive a negative rating by the driver. Uber can “fire” customers who cause problems for its drivers—a reminder that capitalism is a two-way street.
In December 2011, just eighteen months after Travis Kalanick founded Uber, he announced that Jeff Bezos, the founder of Amazon. com, and others were investing thirty-two million dollars in his nascent firm.11 With a net worth of nearly thirty billion dollars,12 Bezos will be fine whether he is paying 10 percent or 50 percent of his income to the federal government. Of course, that is not the point. There’s no such thing as idle capital. The growing number of Uber drivers is testimony to the opportunities Bezos can create if we let him keep his money. Punishing taxes on the rich reduce investment in new ideas that enrich and empower others.
Skeptics need look no further than Apple Computer. Back in the 1970s, Steve Jobs was a college dropout bursting with ideas. But he wouldn’t have gone anywhere without capital. The venture capitalist Arthur Rock invested $57,600 in Apple Computer, and the rest is history.13
Jobs left Apple for a time, but he returned in 1997; and some of his greatest innovations followed. From the iPod to the iPhone to the iPad, Jobs’s revolutionary vision transformed how people buy music, talk on their phones, and use computers. Apple’s stock predictably soared as Jobs quarterbacked all of these exciting technological advances, and it now vies for the title of the world’s most valuable company.
The envious might respond that Jobs invented playthings for the leisure class, that Apple employs the highly trained techno-elite, and the primary beneficiaries of Apple’s share-price revival are the infamous 1 percent. That response is wrong in almost every particular, but for now, let’s consider how Apple’s rise supports the much-maligned notion of “trickle-down economics.”
Enrico Moretti, an economist at the University of California at Berkeley, explains in The New Geography of Jobs that Apple’s more than twelve thousand employees in Cupertino, California, are only the beginning of the story of the company’s contribution. Apple’s success, Moretti found, accounts for at least sixty thousand other jobs in Cupertino. “In essence,” he writes, “in Silicon Valley, high-tech jobs are the cause of local prosperity, and the doctors, lawyers, roofers, and yoga teachers are the effect.”14
Thank goodness Arthur Rock got to keep some of his substantial earnings! A major theme of this book is that all companies and the jobs they make are the certain result of investment. Since money never lies idle, it is an economic truism that the less governments tax those with the most disposable income, the more likely they are to invest that income in job-creating ideas. It’s the rich, by definition, who have the excess funds that the next Steve Jobs is looking for. The government may impose heavy taxes on the rich in the name of fairness, but that “fairness” comes at the expense of the economy and those not yet rich.