Ronald Reagan's Response to the Incentives of the Tax Structure
The starting point for Ronald Reagan was the idea that people respond to incentives. The incentives that he most worried about were those provided by the tax system. According to his budget director, David A. Stockman, Mr. Reagan would regale the staff with stories of how he, as an actor, used to alter his work schedule in response to the tax code.“You could only make four pictures, and then you were in the top bracket,” Mr. Reagan would say. “So we all quit working after four pictures and went off to the country.”
The great thing about Reagan’s stories isn’t that they’re true, since they usually were not, but that often it’s fun to find out where they came from…
Here’s Reagan’s number of movies released, by year:
1937 2
1938 9
1939 7
1940 7
1941 4
1942 3
1947 3
1948 0
1949 4
1950 1
1951 4
1952 3
Hmmm…doesn’t look quite right for four-a-year, does it?
There’s much more in Jon’s post.
Comments
The version I usually heard was that Reagan golfed with doctors. After making so much money, the doctors would do nothing but golf to avoid moving up a tax bracket.
Posted by: TGGP | November 2, 2009 08:46 PM
Actually, the sequence looks exactly like you’d expect if Reagan was very productive early in his career, updated his beliefs, and then switched to low productivity. In 1938-40, he averaged almost 9 movies a year. Post 1940, he never made more than four. I don’t see any inconsistency with his story.
Posted by: Jeff Lazarus | November 3, 2009 09:06 AM
Jeff, the problem is that there are other alternative explanations for the apparent decline. One is that Reagan was sick or injured for parts of 1948 and 1950 (as Jon notes). Another is that his movies started making less money, which meant that studios were less eager to have him as a star.
Posted by: John Sides | November 3, 2009 09:15 AM
The more serious problem with Reagan’s story is that he misrepresents the math. Going to a higher tax bracket means a higher marginal tax rate. That might be undesirable, but it’s not less desirable than making less money. Working more still brings in (a lot) more money, just not as much as if the tax were flat. The slightly smaller marginal income is generally less than the typical variation from movie to movie for an actor.
Posted by: Hans Noel | November 3, 2009 11:00 AM
Hans,
Under the studio system, I don’t think there was any variation from movie-to-movie for Reagan. Also, it is worth noting that the top bracket in the postwar years was very high (although I have no idea how well someone like Reagan would be sheltered from it).
Jeff,
Yes, he cut way back, but that was about becoming a star — he went from churning out junk to working in things that took more time. I have a bit more on that in the full post.
On the policy point, I’m okay with saying that very high marginal rates may be at least a mild disincentive, but only as one factor among many, and never in the simplistic way a lot of supply-siders put it. On the Reagan point…well, his stories just don’t match up very well with external reality. How much truthiness is in them is, I guess, left to the judgment of readers.
Posted by: Jonathan Bernstein | November 3, 2009 12:55 PM