Higher Taxes Mean I'll Work Less
By N. GREGORY MANKIW
Published: October 9, 2010
nytimes.com
(go to it through a search engine link to read the whole thing without having to register)
---
The people are upset at Greg Mankiw
You could try Kevin Drum, Mark Thoma, or Brad DeLong, or some of the comments on MR, among other commentators. Various remarks are made to lower the status of George Bush, or Greg Mankiw, or to raise the relative status of Barack Obama and his fiscal policy. Furthermore not everyone likes Greg's benchmarks, or accepts the typicality of his example.
When I read Greg's piece, I see it as fair to compare current marginal rates to a zero taxation benchmark, without advocating the latter. To understand a tax system you compare it to no taxes, as an exercise, and to avoid potential problems with the near-intransitivity of indifference.
I also see that if a person runs a successful small business, has a long time horizon, has a strong bequest motive, and can earn eight percent nominal a year (make it reinvestment in a private business if you don't buy the equity premium story), that person faces a very high marginal tax rate. In one of Greg's examples it's about ninety percent.
That some producers are motivated by ego does not change that fact. Furthermore, many small businessmen don't receive Greg's global recognition and they really do work hard for the money above all else.
Greg's column focuses on efficiency but I am more struck by the possibility that such marginal rates are morally wrong and I wonder if that is not his view too.
Greg's scenario doesn't have to be a "typical" case and indeed the taxation -- if nothing else -- will ensure that it is not a typical case or not nearly as common a case as it ought to be. Another way to put the point is to note that deviations from a progressive consumption tax may be less morally defensible than we had thought...
marginalrevolution.com
---
Mankiw's Bequest
Oct 12 2010, 2:49 PM ET 260
I basically concur with Tyler Cowen's take on Greg Mankiw's recent column--you can certainly disagree with the analytical choices he made in arriving at the government's cut of his children's inheritance, but the basic point is sound: we tax income many times as it is earned, which is especially hard on capital formation. The means testing of various benefits, from Medicaid all the way to 401(k) contributions, makes this effect even more pronounced.
I don't know how strong the bequest motive is in the average affluent person, but from talking to financial planners, I know that in some cases, it is very pronounced indeed, and influences decisions not just about estate planning, but about retirement and business expansion. The case of parents who spend their whole lifetime building up a small fortune to make sure that their (only) developmentally disabled child will be well taken care of, rather than retiring, is not necessarily typical, but it certainly occurs. Or else financial planners just make these stories up to make me feel sorry for their rich clients, which seems possible, but not all that likely.
How we should think about the effect of taxation on deferred consumption seems to me to be an interesting philisophical debate, as well as a thorny empirical question. But I didn't find much enlightenment on those points from those who disagreed with Mankiw; what I found was a bunch of people who seemed to be angry that rich people are allowed to voice opinions on the optimal level of taxation for people who make a lot of money. Interestingly, no one thought it was odd that they should have opinions on Greg Mankiw's taxes; apparently, it is only opinions on your own taxes that are in bad taste.
There was also, especially from the professors, a lot of weird argumentation that Mankiw essentially must not have any marginal value for money if he writes for the New York Times, because writing for the New York Times does not pay much, relative to Mankiw's existing income. Now, I've known a lot of rich skinflints who would walk a mile to save a quarter, so I am simply inherently skeptical of attempts to derive peoples' time value of money from their income. But more to the point, this seems to assume that there is a single activity--"writing"--for which each individual has a single supply curve.
But this is not even close to being true. I get paid for speaking sometimes. You cannot assume that because I speak to my alumni groups for free, I must therefore be willing to speak whether or not there is money involved. Other groups have to pay me, because I don't have so much free time, and I have no sentimental attachment to the Greater Omaha Chamber of Commerce; if they want to hear me speak, they're going to need to pay me well enough for me to give up some fairly scarce leisure time. Likewise, even if Mankiw is willing to write for the Times, there might be many other outlets that he would write for if the pay were greater. If it were not for the wedge introduced between their costs, and his income, by taxation, we might have more Mankiw pieces.
I think that would be a good thing; I sense that many of the most vehement critics disagree. But it's also worth extrapolating this case study to folks who aren't Greg Mankiw, but who face similar choices. Professors, and to a lesser extent journalists, compete for non-monetary status much more than most jobs. The guy who owns six McDonalds, and doesn't want to open a seventh because that's just one more place he's got to be willing to go in and scrub the toilets when his assistant manager calls in sick . . . those people tend to be more sensitive to tax incentives than Greg Mankiw or Brad DeLong, whose friends will snicker if they buy a Porsche and a McMansion.
theatlantic.com
Response to Queries
My recent Times column generated more email and blogosphere commentary than usual. While it is impossible for me to answer all the questions raised, I thought it might be useful to address three of the more common ones.
If no one is proposing eliminating taxes, why compare the Obama policy to a world without taxes? Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources. It is crucial to know how far we are from that optimum. To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate. Thus, increasing or decreasing a tax rate by 1 percentage point has a small effect on economic well-being if the initial tax rate is low, but it has large effect if the initial tax rate is high. For the margin of adjustment I was discussing (work more now, let your kids consume the proceeds in 30 years) the distortion is very high once all taxes are taken into account. As a result, every change in this tax wedge has a large impact on the size of the economic pie.
Aren't there ways to avoid some of these taxes, such as IRAs and life insurance trusts? Yes, and I use such tax avoidance mechanisms to the extent they are legal and practical. But there are limits to how much they can be used. Thus, while they lower my average tax rate, they do not affect my marginal tax rate. That is, for any incremental income, I cannot do more, so I am facing the full tax bite.
Aren't you motivated by more than money? Of course. I have never suggested that money is my, or anyone's, sole motivation in choosing a lifestyle. In economic models, we often simplify things by assuming that there are only two activities: work and leisure. Work has a pecuniary benefit, whereas leisure has a non-pecuniary benefit. Reality is more complicated. I face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits. Absent taxes, I would choose an optimal mix of these activities. When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits. Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work." Blogging, for instance, or writing op-eds that particularly inflame the left-wing blogosphere.
gregmankiw.blogspot.com |
