What can we learn from bowling about incentives, disincentives and progressive income taxes?
Under the scoring rules of bowling, you get rewarded, not penalized, for being a successful bowler. When a player clears all ten pins using both balls in a frame and gets a “spare,” the bowler is awarded ten points for that frame, plus a bonus based on the number of pins knocked down with the first ball of the next frame. When a bowler clears all ten pins with the first ball in a frame, the player is awarded ten points, plus a bonus based on the number of pins knocked down with the next two balls. With this bonus method of scoring, the points scored for the ball (or two balls) following a spare (strike) are counted twice, and there is a reward for being successful at knocking as many pins down with the least number of balls. A perfect score of 300 points for twelve consecutive strikes actually includes 200 “bonus points,” in addition to the 100 points for the actual number of pins knocked down in ten frames.
Under our current progressive federal income tax system with six tax rates increasing from 10% (for income up to $8,700 for single filers) to 35% (for income above $388,351 for single filers), Americans get penalized, not rewarded, for being successful and entrepreneurial. Reason? The more income you earn and report to the IRS, the higher the tax rate you pay. At the highest current marginal tax rate of 35%, more than one-third of the marginal income of high income earners gets taxed at the federal level, in addition to income taxes paid at the state level, which can be as high as 11% in Oregon and Hawaii, and 10.55% in California. Importantly, a progressive income tax system creates strong disincentives to be productive, because the most successful individuals get taxed (and penalized) at higher marginal rates as they earn more income, at combined federal and state tax rates that could approach almost 50 percent of the last dollar earned.
What if we scored bowling the way we tax income? Then we would subtract, not add points for a spare or strike, i.e. we would penalize and “tax” the best bowlers with disincentives for being successful. With penalties for being successful, we would expect fewer bowlers striving for excellence and a general deterioration in the quality of the sport.
What if we taxed income the way we score bowling? We would then reward the most productive Americans by reducing their tax rates as their earnings increased, not increasing their tax burden as they become more successful. That is, we would do away with the progressive tax system of increasing disincentives for earning income, and we would implement a regressive income tax system that rewards successful income-generating activities the way bowling success is rewarded. Or alternatively, we would at least consider a flat tax system to avoid the disincentive effects of increasing marginal tax rates.
As Steve Moore pointed out in the Wall Street Journal recently, “If we want millionaires to pay more taxes, then we need an economy where there are more millionaires.” And we could create a lot more millionaires under a less progressive tax system with lower top marginal rates than with the more progressive system with higher marginal tax rates that might soon become reality.
Bottom Line: Incentives matter. And just as importantly, so do disincentives. When we think about income taxes, maybe we can learn something about the importance of incentives and disincentives from the scoring rules of bowling.