To: SSU Students
From: Jude Wanniski
Re: Muhammad Aliís Taxes
For our summer lesson today, Iíve dug out another Wall Street Journal editorial I wrote back in the salad days of supply-side economics -- about ďMuhammad Aliís Taxes,Ē March 1, 1976. You can blame the Democratic presidential nominee, Albert Gore, who lately has been preaching against cutting taxes on THE RICH. A quarter of a century ago, THE RICH were really whacked, with a marginal federal income tax rate of 70% in the highest bracket and, as I am reminded in re-reading the editorial about Aliís taxes, a combined federal-state-city rate of 90% in New York City. Itís also amusing to note that I predicted that at the going rate of inflation, everyone in the United States would be in the highest bracket paying 70% at the turn of the century. If it were not for Ronald Reagan, who in 1981 not only cut the top rate to 28% and indexed labor income against inflation, thatís where we would be. The U.S. economy would look like Bangladesh or Zimbabwe. As you will see, the editorial exercise is intended to demonstrate the dynamics of tax confiscation as it applies to the top of an economy, industry or profession. Iíll have another WSJ from the past for next weekís lesson on the topic of Social Security. The fall semester will begin the following weekend and will be devoted to public finance. The Ali editorial can be thought of as ďcoming attractions.Ē
The Wall Street Journal
REVIEW & OUTLOOK
March 1, 1976
Muhammad Ali's Taxes
Heavyweight champ Muhammad Ali says the Internal Revenue Service has a special section just for him. "It's called the Joe Louis law. Before I get paid, they take everything." Ali says that after IRS, his manager and his expenses chewed up the $1 million he was paid for his latest bout he had only $200,000 left.
We're sure not many Americans sympathize with Ali. Even those of his fellow Americans who are also in the 70% federal tax bracket have reason to feel envious. After all, $200,000 is not bad for a nightís work on a punching bag named Coopman. Many Americans need a lifetime to clear 200 grand.
Besides, it is perfectly human for us to take quiet pleasure in seeing a high-income fellow pay a bundle in taxes, for it suggests that somehow it will mean we will have to pay less as a result. How many Americans, on this basis, root for Jack Nicklaus to win all the golf tournaments he enters?
But if, for a moment, we put aside this human weakness that politicians have been exploiting through the ages, it is possible to analyze the economic effects of the champion's taxes. Only then can we determine whether or not it really is in our interests to have him pay most of his income in taxes.
To begin with, it should not be forgotten that strictly in economic terms Ali is worth $1 million per bout with lesser opponents; the worth of a commodity is expressed in terms of the price it can command in the market, and sport fans collectively are willing to give up $1 million that they could be spending on other goods and services in order to induce Ali to fight and provide an entertainment service.
Will Ali provide more such entertainment or less if, instead of being permitted to keep $200,000, he is permitted to keep $500,000? Some prominent economists argue that the higher Ali's taxes are the more he will fight, that he now has to fight five times to keep $1 million, and if there were no tax he would only have to fight once. By this logic the lower the price, the more goods will be offered. This flies in the face of the law of supply and demand. Will Ali fight more or less if he is permitted to keep only $100 of every $1 million?
If we assume the law of supply and demand holds, and Ali fights more for $500,000 than for $200,000, what happens to the rest of the boxing industry? Not only does Ali need more qualified opponents, but when the top wage for champion of the world jumps by 150%, the effect is felt all the way down the line as well. There are whole industries, like boxing and acting, where participants accept extremely low average wages in order to shoot at extremely high rewards at the top. Such industries have been decimated by confiscatory tax rates in the upper brackets, and can be reborn when such rates are cut.
If Ali could keep half of his wages, the boxing industry would immediately attract new entrants, willing to slug it out in the tank towns for peanuts with the prospect of getting $500,000 as champion and probably $100,000 for ranking 10th. Across the land, strapping youths now holding up gas stations -- because employers can't economically employ them at the minimum wage -- would sharpen their skills at boxing. It would become economic for unemployed coaches and fight promoters to reopen abandoned boxing arenas. Ticket sellers, ushers and vendors would be hired.
The more Ali fights, of course, the less he will be able to get for each bout, in accordance with the law of supply and demand. But no matter. He could, in keeping half his wage, fight for $500,000, pre-tax, instead of $1,000,000, and still do better than he does now. The real incomes of all boxing fans would rise, in that they would only have to give up $500,000 in other goods and services to watch him fight, saving $500,000 for other purchases. He could even afford to fight in New York City instead of being forced to Costa Rica and Iran by New York City's 90% marginal tax rate -- including federal and state levies. New York would once again become the center of international boxing. Its employment would expand, welfare rolls would decline and tax revenues from the boxing industry would flow into city coffers.
We are aware, of course, that this little homily may leave some people unmoved, those who prefer a society with more welfare to a society with more boxing. But this is more than a question of taste. After all, at the present rate of inflation, all of us in any business will be in the 70% bracket by the turn of the century.