Memo To: Website fans, browsers, clients
From: Jude Wanniski
Re: Muhammad Ali, After Taxes
It is really fun to poke around the editorials I wrote for The Wall Street Journal more than 20 years ago, to remind myself how cuckoo some of the prevailing economic ideas were at the time. The big hero of the NYTimes and the Democratic establishment at the time was Lester Thurow, who was being groomed to replace John Kenneth Galbraith as the party's chief economic guru. As it turns out, Galbraith is still around, in his 90s, and still an interesting fellow. So is Less Thorough, as we call him, as cuckoo as ever in his economic ideas, with a sinecure as chairman of the Sloan School of Management at M.I.T., an embarrassment to liberals for his endless string of the-end-is-near forecasts. [See Editor Rich Karlgaard's deliciously wicked column in the current Forbes, "The Four Mice of the Apocalypse," one of whom is Mouse Thurow. The others are Mouse Samuelson, Mouse Solow, and Mouse Krugman.] In this March 1, 1976 lead editorial for the Journal, I had a little fun with Thurow, who believed back then that the more you taxed workers, the harder they would work. Those of you who are regular readers of these memos may recall I mentioned a debate I had with Thurow on Crossfire in the mid-1980s, in which I pointed out the Dow Jones Industrial Average had hit another record high that day. Thurow's rejoinder was that the DJIA also hit a record high before Wall Street crashed in 1929. He is still waiting for the Crash, with a yellowed "I-told-you-so lecture" in the inside pocket of his oldest suit.
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 isn't bad for a night's 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 for 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.