Discouraging Greg Mankiw From Working Would be Good for the Economy
by Mike Kimel
Discouraging Greg Mankiw From Working Would be Good for the Economy
Cross posted at the the Presimetrics blog.
A few days ago Greg Mankiw had an op ed piece in the NY Times talking about how even small increases in the marginal tax rate would keep him (and by extension, other talented folks like him) from working.
For a laugh, I pulled data on the top marginal tax rate from the IRS and real GDP per capita from the BEA’s NIPA tables. Data on the latter goes back to 1929, and the tax rate info goes back further.
It turns out that the correlation between the tax rate in any given year and the growth rate in real GDP per capita from that year to the next is small but positive. That is, higher top marginal tax rates don’t seem to reduce real economic growth. Look at the tax rate and the annualized growth rate in real GDP per capita for two years, or three, or four, or five, or six (which is as far as I went) and ditto – the higher the marginal tax rate, the faster the economic growth over the next X years. The correlation is positive, if small.
Now, you may be saying to yourself – sure, but the world is very different now than in 1929 or 1942 or 1968. What about in recent times? So let’s start in 1981, which is more or less when a) the ideas that Mankiw endorses took hold and b) Mankiw’s career began. Here’s what that looks like:
Figure 1.
Hmmm… a clear positive correlation between the top marginal tax rate and the growth in real GDP per capita over the next four years. Using three or five year lags decreases the correlation slightly but results are about the same. It would seem that discouraging Mr. Mankiw from working would be a very, very good thing for the economy. That shouldn’t come as a surprise to you if you’ve read my book and maybe I’ll write a bit more about this when I get a chance.
However, while it may seem like I’m being facetious about how discouraging Mankiw from working would be good for the economy, I really believe it. After all, Mankiw’s work consists in large part of advocating a position in his books, lectures, op eds, and as an advisor that, as the graph above shows, is consistent with slower economic growth, and he’s very good at what he does.
Growth (real GDP per capita) from Bush marginal rates occurred just not for 97% of the US population.
They care about marginal tax rate effects but only for the 3% in the ownership “society”.
When I first heard about Mankiw’s statement, I thought to myself, Mankiw is an academic economist–how would his working less be a problem for the rest of us? I would argue that it would, in fact, be a benefit.
In response to the first post at AB on Mankiw’s OpEd, I made comparison to lawyer behavior. When lawyers see the facts as on their side, they emphasize facts. When the law favors them, the cite the law. When neither does, the speak loudly and offer distraction. The same, standard, I suggested, should be applied to Mankiw. He has offered theory in support of the notion that higher taxes will discourage him from working, because the data do not support his claim. When theory does not support your view, dig up a study that does. When no study (or no credible study, if one has standards) supports your view, cite theory.
I just want to emphasize that this does not seem a facetious standard to me, at all. Watch the behavior of scientists of all sorts engaged in policy debate. Many, many of them do exactly what the old lawyer joke suggests. Mankiw certainly does.
Oh, and while I’m at it. Theory doesn’t actually support Mankiw except with considerable ambiguity. There are two effects to consider when prices change – anybody? Hands? Income and substitution effects. Mankiw is arguing that when he gets less to take home from his last hour of work, he will substitute liesure. It is not at all clear that will happen in general. In theory, the income effect may be strong enough to drive some folks to work more. In reality, small changes in tax rates don’t seem to have much impact. So either we are mostly parked near the point at which income and substitution effects are balalnced, or there are factors which induce us to work the amount that we work other than the marginal compensation rate.
There is just huge evidence that we respond to things other than marginal compensation rates when deciding how much to work, but that is ignored when people like Mankiw make substitution arguments.
“Mankiw is arguing that when he gets less to take home from his last hour of work, he will substitute liesure.” kharris
This clearly indicates that Mankiw is grossly over compensated for the work that he has been doing prior to the additional work that might earn him the additional compensation. I suggest that if $1,000 for what little substance Mankiw can bring to the work product is insufficient to motivate him, he is far too highly compensated for the work he does.
If high marginal taxes push people toward enlightenment rather than accumulation then that is a social good.
I recall some theorists’ heirachy of needs, when a person is beyond survival, reproduction and security they look for other things to motivate them.
Mankiw is arguing there is a point when greed and accumulation don’t work.
Maybe he should take up knitting.
Seek enlightenment, eh?
I’ve read up on this issue quite a bit, i.e. growth rate and marginal tax rates. My research indicates what mankiw says is true when marginal tax rates are at 70%.
William B Jensen,
Obviously it has to be true at some level. The question is where. I’ve had a few posts over the years trying to estimate the optimal top marginal rate for growth. Its been a while, but that 70% sounds closer to the ballpark I came up with than 35%.
My own experience tells me that Mankiw is completely full of shit. My parents are both very high income earners (together they probably earned over $1mm the last year they both worked full time).
The Bush tax cuts, and perhaps to a larger extent the capital gains tax cut, allowed my father to retire early and my mother to cut back her hours. They are certainly less productive now than they used to be.
Mankiw is clearly pretty stupid because he is earning more than $10-15K from labor, incurring massive increases in marginal tax rates that started negative. Once his labor income brings his tax burden above zero, he should be switch from labor to pump and dump. Pump and dump income is never taxed as much as labor income, with rates of 10% to 15% tops.
That Mankiw is admitting he would see a higher marginal rate from Obama’s tax plans just shows he ignored the clear message of conservative Republicans: “we punish labor and reward pump and dump.” Clearly everyone in the US should be running a hedge fund and living off of carried interest. That Mankiw isn’t living solely on carried interest shows he doesn’t understand the tax policies he helped create.