Warren Dew Wrote:Suppose the plumber is in a 35% marginal tax bracket, state plus federal. He charges $100 per hour, and takes home $65 per hour.
The proposal is to cut tax rates at all brackets. If the marginal tax rate is being cut by three-sevenths so are the lower rates. So I will treat the tax cut as being applied to average tax rates.
So working 2000 hrs a year he grosses 200K and keeps 130K under the current system.
Quote:Now reduce his marginal tax rate to 20%.
Now his take home is 160K
Quote:Now he can charge $90 per hour - less than before - while taking home $72 per hour
This gives him a take home income of 144K. Why would he take a 16K pay cut for the same work?
Quote:With a 10% discount, I have an incentive finally to hire him to do the bathroom work I've been putting off.
Yeah sure, but where’s his incentive?
The error you are making is you are tying together the lower tax rate and the plumber’s decision to cut his rates as one event. Thus you see the plumber working 2000 hours at 100/hr and taking home 130K versus the plumber working 2000 hours at 90/hr and taking home 144K—14K more. At the same time he is saving his customers 20K for a total gain of 34K at a cost of 30K in lost revenue to the government, which they make up with increasing borrowing. That is borrow 30K get 34K, which seems like free money.
But actually the two events are separate. The tax cut comes first. This boosts the plumber’s income to 160K. This is now the new basis for comparison for the decision to lower his rates. He could choose to keep the entire 30K bonus and not share any with you. Why wouldn't he do that? That’s what I would do. What would you do?