Marginal benefit

Reagan had also used the line many times in his successful 1980 presidential campaign, making a point about the need to cut marginal tax rates from their Eisenhower-era peak level. Reagan was trying to argue the confiscatory individual tax rates are, after a certain level of economic success, a disincentive to work further.

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But it’s more complicated than that, contend a pair of Louisiana State University economists. Daniel Keniston, an associate professor of economics at LSU, and Abi Peralta, an assistant professor of economics at the Baton Rouge school, found in a study released this month that high-earning actors don’t star in fewer movies when they are forced to pay higher taxes. They do, however, tend to shift from on-screen roles likely to be more lucrative and commercially successful — think of the string of comic-book character movies over the past couple of decades — to “passion projects,” as they’re called in the business. These are unlikely to pay nearly as much but offer more personally rewarding work artistically.

The findings by Keniston and Peralta were circulated as a working paper by the National Bureau of Economic Research this month. Peralta told the Washington Examiner that the two were interested in the question of how higher income taxes affect labor supply. The Reagan quote further spurred curiosity about how the work of the stars the country sees splashed across the big screen (or, just as commonly these days, streaming networks) respond to changing marginal tax rates.

So they set off to see whether Reagan’s anecdotal observations aligned with the reality of most working actors — with the caveat that the economics of movie-making have changed dramatically since Reagan, a silky-voiced Midwestern transplant to Hollywood, joined the “studio system” in the late 1930s. (Currently, big-name stars are more like free agents and have many more venues than just traditional movie theaters in which to act.)

America’s marginal tax rates have dropped dramatically since Reagan’s acting days, in no small part due to changes enacted during his presidency. Reagan’s signature domestic achievement, the Economic Recovery Tax Act of 1981, decreased the highest marginal tax rate from 70% to 50% and the lowest marginal rate from 14% to 11%. (The old 91% marginal top tax rate that Reagan lamented in 1981 was cut to 70% in the administration of a Democratic president, John F. Kennedy, in the early 1960s.) Marginal tax rate brackets have been adjusted downward in the 40-plus years since Reagan’s remarks, mostly downward. For the 2022 tax year, seven tax brackets exist on the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

But the LSU economists’ broader conclusion holds true. Data sets by Keniston and Peralta show that movie stars pulling in big bucks, who find themselves in the nation’s top tax brackets, don’t make fewer films each year just because it means sending more income to the federal Treasury.

Curiously, the study also found that in years with high taxes, actors tend to star in movies that are more highly rated and feature award-winning directors.

“[We] realized that movie stars are some the historically consistent high-earning individuals,” Peralta said. “And so we look at basically the entire modern tax regime of the U.S. and examine whether they actually made fewer movies when taxes are high, and we see very little evidence of that kind of labor supply response.”

When the economists reached the conclusion that there wasn’t a significant change in the number of movies being produced overall, they investigated whether top-shelf actors changed the type or mix of movies that they starred in during lower and higher tax years.

The findings showed that in years with higher taxes, stars gravitated toward “prestige films,” meaning ones that might not be blockbusters that result in massive windfalls for movie stars (and would be taxed heavily). Rather, while those prestige films might not pay as much or earn lower box office receipts, they do offer the stars clout and awards — a sort of payment in and of itself as it boosts the reputation of the actor for future movies.

Keniston told the Washington Examiner that what they expect is going on is that when taxes are high, actors wouldn’t bring home as much of a percentage of earnings from blockbuster movies. But they could continue to get prestige from using their time to star in higher-quality flicks, or even artsy movies, with famous directors.

“The higher taxes get, the less desirable it is to make that blockbuster because you’re just not bringing in as much of your actual paycheck as you would if taxes were lower,” said Keniston. “So what we see is that the tax rate modifies that calculus. It changes that trade-off for the actors, and it pushes them towards making movies where the paycheck is less, but the reputational gains are larger — that’s what we suspect.”

There are lots of stories of actors taking lesser-paying roles in order to work with high-caliber directors or be featured in potentially award-winning films, he added.

For instance, Jonah Hill reportedly took just $60,000 to star in 2013’s The Wolf of Wall Street, the minimum wage allowed by the Screen Actors Guild-American Federation of Television and Radio Artists. Why? Because he wanted to be able to say he worked with legendary director Martin Scorsese.

“That was their offer, and I said, ‘I will sign the paper tonight. Fax them the papers tonight. I want to sign them tonight before they change their mind. I want to sign them before I go to sleep tonight so they legally can’t change their mind,’” Hill reportedly said of the arrangement.

“I would sell my house and give him all my money to work for him,” Hill added.

For his part in the film, Hill got an Academy Award nomination for best supporting actor.

Matthew McConaughey, who also played a very minor role in the Wolf of Wall Street, earned just low six figures upfront to star in Dallas Buyers Club (2013), which had a budget of just $5 million but earned him his first and only Academy Award for best actor.

“That pushed him into a level of serious-quality movies that he hadn’t been doing before,” said Keniston.

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As part of the research, Peralta and Keniston took advantage of IMDb, which is an online database of information related to films, TV shows, actors, and more. IMDb has information on the full career of almost every actor who has ever appeared in a movie, Keniston said. Some of the careers examined are also extremely long and span decades of changes in the tax code.

But did the results of the working paper, which has not yet been peer-reviewed, come as a surprise? Both Peralta and Keniston said that it did. Keniston said he was expecting that the movie stars examined would make fewer films in the higher tax years, as Reagan, the former silver screen king, had warned about for years.