Greg Mankiw’s anti-tax arguments
by Linda Beale
crossposted with Ataxingmatter
Greg Mankiw’s anti-tax arguments
[edits 3:00 pm]
When academics write about our own experiences in op-eds and blog posts, we risk making a common error–assuming that we can view ourselves objectively and that we can rationally dissect the pros and cons of our own situations as illustrative of humanity in general or at least of “typical” people in our circumstances. What we all tend to do is overlook obvious counterarguments to the position we espouse based on our own proclivities.
Talking about the potential lapse of the Bush tax cuts that were overly generous for the wealthy seems to be one of those areas where the trap lurks. Todd Henderson, a Chicago prof with an apparent income of upwards of $350,000 a year, whined about not being “rich” because he was barely able to afford luxuries that wealthy citizens enjoy (a landscaper to tend his lawn, a housekeeper to tend his house, etc.) and would have less discretionary funds to spend if he were to have to pay taxes at the pre-Bush rates. See, e.g., Brad DeLong, In Which Mr. Deling Responds to Someone Who Might Be Professor XXXX XXXXXXXXX, Sept. 18, 2010 (includes the original post by professor Henderson as well as a stinging commentary); Michael O’Hare, The Whining of the Rich, Sept. 18, 2010; The Whining Rich, ReadNews, Sept 21, 2010. As many noted afterwards, people tend to evaluate their circumstances in terms of those who have more: studies show that even multimillionaires think they need about double to be “secure”. Henderson didn’t stop to recognize that most Americans would be delighted to be in his circumstances, and for many of them it would be a dramatic change towards a better standard of living. If you are working two jobs to support a family of four and still have to make priority decisions between buying new jeans for your first-grader or buying better food for the toddler, then the idea of having several hundred of discretionary dollars a month after the luxuries Henderson reported as his necessary “expenses” (much of which was actually savings) would seem incredibly wonderful.
Mankiw, I think, has fallen into that trap, too. See Mankiw, I can afford higher taxes, but they’ll make me work less, New York Times, Oct. 9, 2010. He notes that “Republicans say raising taxes on those who already face the highest marginal tax rates will hurt the economy” and proposes a case study–himself. He acknowledges up fron that he “can afford to pay more in taxes” and doesn’t “have trouble making ends meet.”
(Dan here…also see Economist’s View – Is it really the money?
Nonetheless, as Republicans emphasize, taxes influence the decisions I make. I am regularly offered opportunities to earn extra money. It could be by talking to a business group, consulting on a legal case, giving a guest lecture, teaching summer school or writing an article. I turn down most but accept a few.
And I acknowledge that my motives in taking on extra work are partly mercenary. I don’t want to move to a bigger house or buy that Ferrari, but I hope to put some money aside for my three children.
He claims that if he is offered $1000, his taxes, the corporate tax on his stock investments (treated as directly reducing his dividends and capital gains from the stock), a low rate of return, and estate taxes mean that his kids with get “at most, $1000” from his current $1000, making the opportunity not worthwhile. Therefore, he will decline more service opportunities if the tax rate increases and all Americans will “bear the burden”, since their favorite singer, surgeon, orthodontist or others will provide fewer services.
He assumes a tax rate of 39.5% (highest federal rate) plus 1.2% because of the phase out of deductions at high income levels plus medicare tax of 3.8% plus Massachusetts income tax of 5.3% (minus an unspecified return because of the federal deduction), claiming that leaves him $523 out of the $1000. He says that without any taxes, his corporate stock would provide a return of 8%, while he claims that with corporate taxes he only gets a 5.2% return–asserting that the corporation “pays a 35% corporate tax on its earnings”. He pays taxes on that income, so he claims his after-tax income on his investment is only 4%, resulting in $1700 after 30 years, which he claims is hit by the estate tax at a high marginal rate (he assumes somewhere below 55%), leaving his kids about $1000.
This analysis misses at least a few points (in addition to the fact that hardly anyone pays an effective tax rate equal to the statutory rate, once all the relevant provisions are taken into account, including deductible expenses to generate income, etc.).
•As to the basic premise of declining opportunities merely because the tax rate increases: Mankiw may have sufficient income and insufficient cravings for more to decline opportunities for more pay more readily than others, as he states, but there is an inconsistency between his stated goal of having more to pass on to his children and declining even more opportunities because of an increased tax on the opportunities accepted. Assuming his calculations are accurate and that he really wants to pass on more to his kids, then he can’t really be sure that he would pass up the opportunity to work a little bit more to have more. He claims his kids will be $1000 richer for his working, and that means $1000 poorer if he doesn’t take the opportunity. If his kids’ wellbeing is his only goal, then if there is no new tax cut that effectively extends the Bush tax cuts he’s enjoyed for most of the last decade it appears he would likely take that job and figure that $1000 is better than nothing. In fact, because of the increased tax bite, if his goal is really raising the amount available to his kids, he should take two opportunities now for every one opportunity that he took when the Bush tax cuts were operational to his benefit.
•As to corporate tax: Even many corporations that earn significant economic income pay absolutely zero in corporate taxes because of the many loopholes/tax expenditures in the Code and the ability to manipulate their taxes through agressive transfer pricing. Even corporations that end up paying taxes don’t pay taxes at the statutory rate on their full economic income–the average effective corporate tax rate in the US is somewhere around or below 25% (varying depending on industries). And of course a corporation can change its policies on retention or distribution of profits taking into consideration the relationship between corporate taxation and shareholder taxation. And what about the incidence of corporate tax? Is it passed on in full to shareholders, as Mankiw presumes? That’s not so clear as he suggests.
•As to estate tax: Mankiw disregards the fact that there will likely be a significant exemption under any new estate tax law that might replace the return of the 2001 estate tax as legislated under the Bush tax cuts. It will likely be an exemption of more than $1 million, perhaps as much as $3.5 million (double for a couple). So that $1700 won’t be taxed at 55%. The effective tax rate on most estates that are actually taxed (ie, have some estate in excess of the exemption) is much lower than 55%, so the effective tax could be around 14% (depending on the size of Mankiw’s estate and his willingness to engage in estate planning).
•As to the calculated no-tax-at-all 8% return from his corporate stock investment: there are many issues here, but the biggest problem is Mankiw’s total disregard of the impact of non-taxation–or just insufficient taxation– on the his corporation’s business and his own ability to earn income from speaking, writing and whatever. Most countries with ineffective tax systems find themselves unable to function appropriately. Ineffective markets because of the lack of appropriate governmental limitations would be a certainty. Both the speaking engagements and the corporate profits might well vaporize in a no-tax or even an insufficient tax world. Since the wealthy like Mankiw benefit significantly from government and receive preferential tax treatment on their financial assets (of which they own the vast majority), they would be the most negatively impacted by the lack of appropriate government safeguards.
In short, Mankiw admits that he already makes one-on-one decisions about which opportunities he will pursue, and chooses to pursue few. He claims that taxes would lead him to choose to pursue even fewer, based on his calculations of the taxes on that incremental income, even though his reason for pursuing any opportunities at all is to set aside money for his children’s future. Clearly, there are lots of tradeoffs to be made, and various factors come into these decisions (taxes, leisure, desire for status, etc.). As others have noted (see comments on TaxProf posting), someone with Mankiw’s economic training and in his sought-after position should know how to bargain for the after-tax return he desires and be able to do so because of his considerable bargaining power. And as I’ve noted here, having a bigger tax bite should work as an incentive to work more, not less, if his goal is really to provide more for his kids.
But let’s assume that it is possible that he would turn down more posts if there were an incremental increase in his tax rates due to the expiration of the Bush tax cuts. In that case, does that mean that the economy suffers, as Mankiw asserts? He suggests that when stars turn down additional earning opportunities, the not-rich bear the burden because the service provided is simply not available. But in fact that is when competition increases, which economists usually argue is good for economic growth. For every surgeon who turns down yet another operation, a path is opened for another surgeon to gain expertise and higher pay. (And the up-and-coming surgeon may even turn out not only to be available at a bargain, but a better surgeon more familiar with newer techniques.) For every speaker who turns down a speaking engagement, another with competent qualifications is waiting in the wings to become a star (or at least receive this incremental increase to compensation). The economy is in fact served by spreading the service opportunities across more people and allowing more people to develop a level of expertise that is worthy of higher compensation, instead of allowing a few “stars” to garner all the income. That is the way we achieved dramatic growth in the post-war years.
So go to it, Mankiw. Turn ’em all down, so that budding young economists–maybe even some women and people of color for a change–will have their chance in the limelight.
Do not forget the step up on inherited stock where the IRS assumes that the stock is valued at the price it traded at at the time of death so that the “effective” tax on inherited stock is zero, not the 55% he built into his example.
Mankiw sounds, well, rather lazy to me. For one thing, he doesn’t seem to value the opportunities that just happen along the way to making a presentation or the people you meet with at that awful luncheon you have to attend or the insights that might occur to you just listening to other smart people. And, is it really such an awful burden to be Mankiw that the money he can generate just by talking is chopped liver to him?
Oh, sigh. Oh, dear. Another dreadful day of being the best economist in the world and having nothing further to achieve. As Spenser points out, he might be well served to spend a little time making sure his numbers are right before he launches into another whiny ranting. NancyO
Ranting should be rant. NO
As a retiree with a total income of between 50,000 and $60,000 per year, I can’t afford to turn down work even though my marginal income tax is over 66% — half again greater than Mankiw’s. No Republican will ever mention that the highest marginal income taxes are paid by middle-class retirees because it was Reagan’sincrease of the tax on Social Security income which causes it. My annual income is comprised of about $25,000 Social Security, $10,000 IRA distributions, and $25,000 self-employment income. My marginal federal income tax tax rate is 25%; however, thanks to Reagan, for every dollar of marginal income I make I get taxed on an additional $.85 of my Social Security income. Hence, my total marginal income tax rate is 25% plus 21.25%(.85×25%) plus 12.5%(self-employment tax) plus 7.5% (state income tax) = over 66%. I understand why the Republicans won’t discuss who really pays the highest marginal tax rates but I am totally nonplussed that the Democrats don’t.
As a retiree with a total income of between 50,000 and $60,000 per year, I can’t afford to turn down work even though my marginal income tax is over 66% — half again greater than Mankiw’s. No Republican will ever mention that the highest marginal income taxes are paid by middle-class retirees because it was Reagan’sincrease of the tax on Social Security income which causes it. My annual income is comprised of about $25,000 Social Security, $10,000 IRA distributions, and $25,000 self-employment income. My marginal federal income tax tax rate is 25%; however, thanks to Reagan, for every dollar of marginal income I make I get taxed on an additional $.85 of my Social Security income. Hence, my total marginal income tax rate is 25% plus 21.25%(.85×25%) plus 12.5%(self-employment tax) plus 7.5% (state income tax) = over 66%. I understand why the Republicans won’t discuss who really pays the highest marginal tax rates but I am totally nonplussed that the Democrats don’t.
Pmalter0, yes there is that tax on SS benes that helps pay for the tax cuts and other tax advantages enjoyed by those with capital gains and other types of unearned income. May I also point out that you must still pay your full share of FICA/HI tax for about another 12.4% of net on your SEI. I would certainly offer your income/tax profile as typical of the majority of retired people who can and do still work. Your point is well taken. NancyO
What sort of economist thinks that the marginal utility of $1000 is negative?
Well, first
it would obviously be better for the economy if Mankiw worked less.
second, the whole debate is bogus. we don’t pay taxes to “incentivize” work.. we pay taxes to pay for what the country buys.
the “i won’t work if you tax me” whine of the rich is mostly a lie, but if it were true there is no reason to think “the economy” would suffer. you’d think these guys never heard of competition. or they really believe they are irreplacable geniuses manfully slaving way for an ungrateful public to fill the intelligence shortage that the country would suffer if they took a break.
i think we should risk it.
and try the experiment of paying our bills.
what manky proposes is impoverishing his children by leaving them a country deeper in debt, or by abolishing the government services that help to keep the working class, and small business class, out of levels of poverty not seen since… well, since before the New Deal.
Clinton also raised taxes on your Social Security benefits see Omnibus Budget Reconciliation Act of 1993.
Yes, I stand corrected. My conclusion remains the same, however.
Higher rates on unearned income will make him work less ? How — will he use a 3rd butt cheek when sitting in his Barca-lounger ?
Why is the lower tax rate expiration allowed to be framed as an attack on the higher income people ? It’s merely a return to the Clinton rates, which permitted a balanced budget, 20 million new jobs and the best economic performance since the 1960s !
I had to accept a paycut well over 10%(on all of my income) for the good of my company so it doesn’t really break my heart that people making more than twice my income have to take a 4.5% paycut for amounts over $250,000 for the good of the country (remember, these are the same people who constantly carp about deficits).
Why are you all being so polite? Mankiw is a god damned liar.
I’ll just point out that Mankiw makes the comparison of his tax situation vis-a-vis an imaginary tax-free world, NOT vis-a-vis the current real situation where the increased tax rate and phase out of loopholes will effect him to the tune of about 5%*, not the almost 50% number he uses but doesn’t bother to either calculate or note for us. Also, it includes his state taxes which are unaffected and irrelevant to the discussion. Worst of all, he adds in the medicare portion of FICA, which is not going to be effective because he is far above the ceiling. All things considered, it is a thoroughly disgusting exercise in sophistry, mendacity, and narcissism. Extraordinarily impressive – Wow, and more WOW!
* And, lest there be any misoverestimating, that only applies to the portion of his income in excess of $250,000.
Apparently he also totally unaware of the estate-planing tax-avoidance opportunities available to the rich via trusts, etc.
This asshat teaches Econ at Harvard.
It’s no wonder WASF!
JzB
I’m hoping that after reading Mankiw’s nonsense, the market will dictate that no one ever again considers paying him to write or speak publicly. A slap from the “Invisible Hand” is in order.
The real tradeoff Makiw would make (if saving for his kids) would be whether he could now earn more than they would be able to (in the future). Since he is a “star”, he would certainly conclude that, even after taxes, he could earn more than his kids could.
Just to keep it straight, Medicare does not have the same cap as SS.
And it is worth noting that not a damn thing he says here is “original.” It’s all standard Randian claptrap. If the government taxes me I’ll go Galt.
No one with any self respect would write this stuff, which makes me think that maybe Mankiw couldn’t stop “working” if he wanted to. If he failed to turn in his assignment, he’d hear from da Boss.
Yes, I think this article is a cry for help. Greg is being held prisoner, forced to churn out propaganda or they’ll break his knees.
Mankiw’s argument is absurd on two levels, at least. First, the argument that an incentive to work for the next dollar is reduced by any increase in taxes can be applied to each preceding dollar. Pretty soon you’re out of work entirely fearing that if you work at all you will have to pay taxes on that income. Secondly, Mankiw doesn’t make it clear that the increase in the marginal rate only applies to each new dollar that is earned at that higher rate.
Arne –
You’re right – I’m wrong.
No cap on the Medical part of FICA.
The things you learn . . .
Thanx,
JzB
Arne
that’s true. but it should. just another of the little ways the Idea of Social Security has been spoiled by good intentions.
Well, if Mankiw is doing his own taxes, he oughta quit and get H&R Block. NO
and now for something completely different
Linda spoils a perfectly good essay by dragging in “equal opportunity” for no good reason except its a good cause and should be mentioned every chance you get even if it has nothing to do with what you are talking about and turns off the people you would like to convince.
Don’t get me wrong, I’m all for equal opportunity. I just get tired of my liberal friends destroying their case for intelligent economics, as well as equal opportunity, by dragging in the Need to do something about the poor women and gays and colors and lower slobovians and starving children on the bora boola ga. It gives Rush something to talk about.
Mankiw responds to his critics:
http://gregmankiw.blogspot.com/2010/10/response-to-queries.html
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.
Since I’m not an economist, I don’t inderstand this at all. It looks like anti-tax Chicago School bullshit. Nothing is “absent externalities” and he thus blithely dismisses all of the reasons for and benefits of taxation – right? Can anyone 1) translate into English, and 2) critique the content?
He’s saying that going from 1% to 2% tax is trivial, but going from 36% to 37% is onerous. It’s one buck per hunded either way. Is there any realistic way of looking at the universe where that makes sense?
Cheers!
JzB
Maybe Mankiw means top say that if taxes go up 1% of the marginal rate, the increase is greater at the higher margins. It’s still BS. As noted, if it isn’t worth doing the extra work because of the tax bite then it isn’t worth doing any other work sjnce that work is also subject to taxation. Maybe Mankiw means to say that he doesn’t like paying part of his hard earned money to the Treasury Dept. However, it is a strange reason that he gives us for his distaste. Is he really pissed off that he won’t be able to leave his kids the extra money that he has to pay in taxes on his current income? Maybe he should simply ask around and find good jobs for those kids. He’s well known and has some degree of influence. Or, is he saying that his kids either can’t, or don’t want to, or are incapable of earn(ing) their own compensation?
Speaking of hands, don’t expect that Mankiw’s will ever go empty for writing something like that. In our culture, that’s the kind of writing that pays best. It pays you the really good speaking fees – the ones Mankiw stoops to pick up. It gets you the board membership. It gets you the tasty think tank spot during his year away. We need to remember that part of the benefit of income is security. Mankiw just got himself a pile of security without having to pay taxes on it. He left that part out.
No, he’s right. Maybe there is an excess of precision in his answer – exactly the square of the tax rate? Hmmm.
I recommend thinking of everthing having to do with pay in terms of after tax money. If my rate is 75%, then my actual pay is $25 out of every $100. A 1% cut in my rate is a 4% increase in my pay. If my rate is 25%, then my actual pay is $75 out of every $100. A 1% cut in my rate is a 1.3% increase in my pay. So my pay goes up 3 times as much for a 1% change in the tax rate starting at 75% as it does starting at 25%. Since what I care about is what I actually get (ignoring bragging rights, resentment, and such), there is a lot more motivation is tax changes when rates are high.
There is no incentivization in either case, or in any case, because that’s a stupid word. We already had a good word for it. That longer, “ization” word is just one of those things MBAs say to make it sound like they know new stuff. That “ization” word is an offense against Barrett and Browning, Yeats, Milton, T.S and e.e. Against all Strunks and every White that I know of. Against Webster, and his Devil.
kharris –
Thanks for the explanation. I think the square term is a rule of thumb approximation.
But if economics proposes that, economics is a ass.
Either way, you have exactly one dollar more or less of purchasing power. Economic well being is determined by what you are able to buy, and that translates to actual dollars in hand, not relative percentages of change. So this abstraction really is Chigaco School bull-shit.
and WASF,
JzB
The dollar more or less of purchasing power, in a sane world, matters more to (and is less likely to be saved by) somebody earning $25 than somebody earning $75. In theory, Mankiw’s point is correct, logical, all that stuff. However, Dr. Goolsbee’s research into changes in labor market behavior in response to changes in tax rates found nothing but a change in the exercise of stock options in response to anticipated tax increases. The response that Mankiw claims he would have to a higher marginal rate is not observed in nature.
The rule among lawyers is that when the facts are on your side, bang the facts. When the law is on your side, bang the law. When neither one is on your side, bang the table. Mankiw is banging theory. I’d guess that he is aware of the lack of empirical support for his position. Otherwise, he’d be banging the data.
Uhhh…trusts aren’t tax avoidance techniques. For an irrevocable trust the corpus is outside of your estate but any items the Grantor gives the trust is subject to gift taxes which are higher than income taxes. A revocable trust is in the Grantor’s estate. Trusts can help mitigate estate tax liability (although you may be subject to gift taxes) but you cannot avoid that liability.
your comment about framing is terribly important. I try to remember to note that the issue is whether to “enact a new tax cut for the wealthy when the Bush tax cuts expire as slated by the GOP enacters” .. That is at least somewhat better than the language that the right has pushed, and the MSM has willingly adopted, of talking about “tax increases on the rich” if no action is taken to “extend” the Bush tax cuts.
The way we use language to frame the tax discussion is a huge part of the “tax rhetoric” problem. At some point, we have to quit trying to create sound-bites to confuse people while winning their votes and start trying to talk about what is good for the country and its people. We have always have some politicians and “think” tanks that are mere charlatans. But it seems that we now have fewer who have integrity and are willing to talk honestly about taxation.
Does Mankiw or anyone else really sit down and figure out how much a particular speaking engagement will net his kids as their inheritance? I have been reading y’all’s remarks and thinking all this over. I am thinking that jazzbumpa was right to ask why we are so polite. You know, Mankiw must think we are all complete idiots to think we would credit his absurd argument. I have lived a long time without knowing what Mankiw thinks and I can live the rest of my life without him. If this is the best he can do to justify his work, then I can rest assured I’m not missing anything. Smiling as I go, I say goodbye to Mr. Mankiw. NancyO
Coberly–dragging in equal opportunity has everything to do with economics. The idea that it doesn’t is another leftover from the freshwater nonsense (e.g., Gary Becker famously “proving” that there was no problem with discrimination because the market would clearly operate to cure it so we didn’t need to try to do anything about it).
Our past experience has shown that when we have the kind of economy that creates opportunity for more, we also have the kind of economy that provides growth and the kinds of monetary rewards that we think the economy ought to provide. That includes the idea of minorities having opportunities that they didn’t have before. They become bigger consumers, creating sustainable demands for new businesses in their environs, creating new jobs for others, etc. etc. etc. Why do you always see a need to divorce social justice from economic justice and from our ordinary targets for an economic system, when in fact they are so closely entertwined?
The top tax rate is currently lower than it’s been in probably 80 years (don’t know for sure, too lazy to check – it’s many, many decades). How can these whiners look at the history of people working, saving, starting businesses and getting wealthy in all manner of economic environments since the Depression and say, “if you raise rates from an all time low to a rate that is slightly higher and still low by historical standards, I and people like me will work less and that will hurt the economy.”
My grandfather worked and saved in the business and tax environments of the 30’s, 40’s, 50’s, 60’s and 70’s. He continued to invest in the 80’s, 90’s and 00’s. This despite depressions, recessions, wars and top tax rates higher than now for the vast majority of that time. And he was never a CEO or a rock star. He made it as high as VP and retired at a time when CEO’s made 20x average pay rather than 200x. He managed to accumulate quite a nest egg. Enough to allow him to make his 3 children and 5 grandchildren wealthy through annual gifts. Enough for him to set up trusts for his 8 great grand children to help pay for their educations. And even after all that, he was still worth millions when he died. I sure am glad he didn’t decide to stop “putting aside money for his children” or choose to work (and earn) less every time his taxes went up.
coberly: “we don’t pay taxes to “incentivize” work.. we pay taxes to pay for what the country buys.”
We pay taxes to disincentivize people like Mankiw and Reagan (who claimed that he made fewer films because of taxes). 😉 Maybe it will work, what do you think?
A cap on Social Security taxes? Good intentions? Surely you jest.
“Yes, I think this article is a cry for help.”
Stop me before I write again!
😉
Mankiw: “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.”
But, to be nerdy back, what about the moral value of money?
Incentives to work ARE reduced when net income is cut. This is even more true above poverty income levels. I don’t see many people who make 60k in their regular job picking up a 2nd gig at a minimum wage establishment. You might not be willing to give up two hours with your family to tutor a kid for 20 dollars, but if the pay were 1000 you would be more likely to take up the offer. Taxes affect this decision in the same way.
Mankiw’s argument is about incentive, that’s all. I think most of us disagree on the order of magnitude, not principle, when it comes to taxing income. Otherwise, Mankiw’s critics would argue that if every dollar over 250k were taxed at 99%, he would work more and all of the nation’s problems would be solved. Likewise, the right would argue that if income above 250k were untaxed, the rich would produce an unlimited supply of jobs to the middle class and the nation’s problems would be solved.
Whether the bump from 36% to 39% has that much impact on the rich’s decision is what we should be debating. As it is, it seems like a bunch of whiners on both sides right now.
BH
You’re comment is well said and well worth remembering. Our fathers and theirs lived well on far less multiples of average earnings. It isn’t a matter of how much you have, but, instead, it is how much you want. We are living in an age of avaricious greed and the more one has the more they seem to want, rather than need. I suspect that if anyone has done a study of the relationship between needs, wants, and income they would find a high positive correlation between the income and the want for more of it. We are certainly in the midst of a me first generation. Worse yet it is me first at everyone else’s expense. Mankiw, of all people, knows full well that the cost of government has to be borne by its citizens. If some pay less others will pay far more. It is a shame that some are so unpatriotic that they can’t support the government that supports their life styles so well.
“Our fathers and theirs lived well on far less multiples of average earnings”
Your comparing Paper Airplanes to F-16 Fighter Jets. America was the leader of Industry and Agriculture in those days, back before China and NAFTA.
Back then even though the upper income brackets were supposed to pay at a higher tax bracket, somewhere around 90%, it didn’t get paid, because of all the loopholes and incentives.
Back then the actual share of Federal revenue paid by the upper percentiles was less of a share then what is happending today. In other words, if you can’t control the spending there is no point in argueing about taxes, also the debate whether or not the wealthy pay their fair share of taxes is irrevelent, they already pay the overwhelming majority share, the amount of revenure needed to make any difference what-so-ever can’t come from taxing the wealthy….we should be raising taxes on the people who pay none, while cutting spending, while targeting stilmulus spending more efficiently.
In 2009, the relative worth of $100.00 from 1950 is:
$891.00 using the Consumer Price Index $750.00 using the GDP deflator $1,310.00 using the value of consumer bundle $1,450.00 using the unskilled wage $1,690.00 using the Production Worker Compensation $2,390.00 using the nominal GDP per capita $4,850.00 using the relative share of GDP
In 2000, the relative worth of $100.00 from 1950 is:
$715.00 using the Consumer Price Index $605.00 using the GDP deflator $1,020.00 using the value of consumer bundle $1,150.00 using the unskilled wage $1,250.00 using the Production Worker Compensation $1,820.00 using the nominal GDP per capita $3,390.00 using the relative share of GDP
In 1990, the relative worth of $100.00 from 1950 is:
$543.00 using the Consumer Price Index $493.00 using the GDP deflator $759.00 using the value of consumer bundle $834.00 using the unskilled wage $930.00 using the Production Worker Compensation $1,200.00 using the nominal GDP per capita $1,970.00 using the relative share of GDP
min
worth a try. but you see what Reagan did with his spare time.
min
not this time. the cap on SS is what keeps it from being welfare. removing the cap on medicare makes it welfare… a reasonable cap would be better. if the people had to pay their own medical insurance, one might hope their bosses would have to raise their wages, or the government would have to intervene to control costs.. but i don’t think we want welfare as the normal way of handling a very large part of the economy. the basic way of life for most people.
kevin
as one of the biggest whiners, i think you lost track of what was being said here. no one argues that taxes may be part of the incentive picture for work at the levels of income mankiw is talking about. one does argue that he is being honest about his incentives at the level of taxes being talked about.
and one also argues that maybe it would be better if the people at mankiws level did have a little less incentive to “work” and consume. after all, there comes a time when it’s time to push yourself back from the table.
LInda
i guess i wasn’t talking about Grand Economics in which Social Justice is the Root of all Causes.
I was talking about decent style… one does not introduce a new subject at the end of a short essay.
And giving yourself a decent chance to persuade the persuadable instead of shooting off your foot which you have just placed in your mouth on accounta the Inustice of it All is something you can’t not speak about whatever the occasion.
Harris
I would disagree a bit.
If i make a million dollars and pay 25% tax I get to keep 750,000 dollars.
If I make 20 thousand dollars and pay a 10% tax, I get to keep 18,000 dollars.
And just to make it fit better with your point, if the millionaire tax goes up one percent, he gets to keep 740,000 dollars. This may be real loss of incentive for him, but my guess is that he never even thinks about it except when he’s on a rant about taxes.
IF the min wage guys tax goes up !%, he gets to keep 17,800. Now I’m not sure he’d notice the difference either, in the real world. but you can be fairly sure that 200 dollars would mean more to him than the 10,000 means to the millionaire in terms of actual hardship,not the imaginary kind that economists like to talk about.
harris
i guess your second reply to min agrees with what i was trying to say. we have a failture to communicate when you say that “logical” means “right.” As an old logic hand, I can make anything sound logical. and that’s all logical means in the end “sounds right to me.”
Min
and what the hell does “economic well being” mean in the context?
i think the technical term for the logical form of Mankiw’s argument is “damned lie.”
That he has to resort to percents, and to take the backside of the tax equation to argue that the “percent of his after tax income left after an increase in the tax rate..” should alert you that some straining is going on here. he is saying “I am so clever I can lie through my teeth while talking through my ass, and you can’t do anything about it but smile.”
Saying he is “right” is equivalent to saying the father of lies was “right” when he told Eve she would “come to know good and evil.” The fact was she aleady knew good, so she would only come to know evil. Mankiw studied in this school of logic.
A similar fast one is pulled when they say the SS tax will go up 33% ! without telling the mark that that’s 33% of 6%, or 2%. Misleading someone to their harm is lying, even if you never say a single word contrary to fact.
I don’t know if the effect of taxation on income has been studied in any comparative manner. it would be interesting if one could present a body of data which compared the effect of the marginal rate at which additional income is taxed with the rate of pay for that additional income. In the absence of any such comparative data I’m going to stick to the intuitively parsimonious interpretation that at any level of income it is the rate of earnings at which the additional income is paid that motivates the worker at all points of the income distribution. The wealthiest earners may pay a higher rate of tax, but the higher level of earnings is likely to offset the disincentive that such tax may seem to harbor. Half of $10,000 is still a hell of a lot more than 75% of $1,000.
kevin
btw
according to Statistical Abstract the actual tax rate paid by the rich runs about 22%… the marginal rate is a bit misleading.
“Let’s say I’m a Waiter and I have played by the rules all year, claimed all my tips, and come December, I realize that my taxable income is going to push me into the next tax bracket, and I will have ended up making less in a year period, by actually working more hours. What would I do? “
This is a lie. One can NEVER make more taxable income, be pushed into next tax bracket and then end up with LESS take home pay. You completely misrepresent how taxation of income works. When you make more money ONLY THE MONEY above the bracket cutoff is taxed at the next highest rate not your entire income. You will NEVER get an income raise and take home less than before BECAUSE of taxes.
The real problem with this argument is Mankiw acts like the problem we have with this economy is not enough people who want to work EXTRA. Raising his tax rate may induce him to not work but it wont lead to any UNemployment. It may make him decide to forgo the effort to earn some extra pay but that paid work he is forgoing will not be left undone, as long as someone will still pay for it. If they arent willing to pay for it then it shouldnt be done, or at least it shouldnt be called “work”, we refer to that as charity.
How can a man who calls himself an economist be so confused about economics?
Greg
worth adding that in Mankiw’s bracket, if his taxes goes up he simply asks for more pay, and gets it.
The post engages in a number of corrections to Mankiw’s estimated tax, without coming to a conclusive number. I would argue that even at 80, or 70%, Mankiw’s argument that taxation may dissuade him from working still stands. It’s not really in Beale’s baileywick to guess Mankiw’s preferences, or whether Mankiw is working the optimal number of hours given the current taxes. At the margin, higher taxes will result in less work. The crux of the argument is then that:
“For every surgeon who turns down yet another operation, a path is opened for another surgeon to gain expertise and higher pay.”
This seems a poor argument to me. The best surgeon, the one who could have commanded the highest pay, leaves the pool. How does limiting the choice set benefit everyone? This is equivalent to adding exogenous constraints on allocation of resources. Why then not tax at 100% the top half of the surgeons in the country? That would surely spur competition among the bottom half, at a lower price.
There is not much else to this blog post, other than a snarky conclusion, as if Mankiw foreclosed opportunties for the oppressed minorities:
“So go to it, Mankiw. Turn ’em all down, so that budding young economists–maybe even some women and people of color for a change–will have their chance in the limelight.”
That’s probably the best one can hope, when you’re Linda Beale attacking Greg Mankiw.
Why does Mankiw even consider laboring for income given he helped craft tax policies that punish labor income by giving tax preferences to pump and dump. Clearly the tax law should be driving Mankiw totally away from labor and into pump and dump, perhaps as a hedge fund manager getting solely carried interest income taxed at a maximum 15% at the Federal level with nothing going to FICA.
Clearly, the tax laws reward taking firms private, like those mattress firms and Readers Digest, manipulate the books so assets are stripped by loading them up with debt at paying dividends taxed at 15%, no FICA, then IPOing the debt laden firm with cooked books showing high profits (from slashing investment) for the short term and cashing out capital gains taxed at 15%, no FICA. The firms going into bankruptcy a few years later is the positive value of those Mankiw endorsed tax policies because they created the wealth that a smart Mankiw would have gained at 15% tax, no FICA.
That Mankiw is talking of labor income means he can’t comprehend his own tax incentives and his economic theory behind them.