Greg Mankiw: I Can Afford Higher Taxes. But They’ll Make Me Work Less.

http://www.nytimes.com/2010/10/10/business/economy/10view.html

by cwan • 16 years ago

43 92 16 years ago

tptacek15• 16 years ago

Long story short: Mankiw could take a $1k speaking engagement and, after 30 years of compounding 8% (please pass on stock tips, Mankiw) growth, pass on $10,000 to his children. But because of a battery of taxes, it will only come to $1700. And because he will likely be dead after 30 years, the estate tax will chew up another $700. Therefore, he won't do the speaking engagement.

"In effect, once the entire tax system is taken into account, my family's marginal tax rate is around 90%".

While continuing to point out that the US has a lower tax burden than Denmark, Sweden, Belgium, Italy, France, Austria, Finland, Norway, Hungary, Luxembourg, The Netherlands, The Czech Republic, Portugal, Germany, Iceland, the UK, Poland, New Zealand, Spain, Canada, Greece, Australia, Switzerland, Slovakia, Japan, and Ireland, and also pointing out that several of America's most unprecedented periods of economic growth occurred under significantly more onerous taxes than Mankiw faces in 2010, I concede that there is in fact a coherent narrative that he can construct in which a Harvard professor might turn down a speaking engagement because of the rollback of the Bush tax cuts. That's a price I'm willing to pay, but you'll have to make up your own mind.

toddh• 16 years ago

A lot of dreaming and fantasy reasoning going on there. A compounding rate of 8% is a false premise to start from. Ask anyone who has figured the lat 20 years into their retirement calculations. A more rational take would be to assume you can't project rates in the future, but if you do the talk you will get money now, which has value now. A bird in the hand. And if he is concerned about what happens to his money after he dies then the most rational approach is to spend it while alive. History shows the heirs will waste it away.

CoreDumpling2• 16 years ago

Not just dreaming and fantasy, there's some actual numerical sleight-of-hand going on here. He's taking advantage of people's misunderstanding of compound interest.

Exponential growth will ultimately trump all other linear factors, even if the exponent is small. And that's also what makes small differences in that exponent so important (hence why computer scientists go through great pains to reduce complexity of matrix operations from O(2^2.51) to O(2^2.36)). Even if the investment only earned 1% per year, he can just sock it away in a 100-year trust fund:

    >>> 1000 * (1.01 ** 100)
    2704.8138294215287
    >>> 523 * (1.005 ** 100) * .45
    387.54342961962465

BAM - 85% "marginal" tax rate.

Plus, he has deliberately framed his scenario to take the maximum hit from taxes at every step. Corporate tax eats into his dividends? OK - invest in a growth stock instead of an income stock, and pay capital gains taxes when realizing the profits instead. Estate taxes steal most of the money from his heirs? How about he write a check to the university on behalf of his grandkids -- Uncle Sam won't see a dime of that.

joshu• 16 years ago

I like how he compares the hypothetical 8% compounding to the concrete values of the tax cuts.

fennecfoxen• 16 years ago

I like the implied reasoning saying that "Other governments are willing to take a bigger slice of the fruits of your labor, so you have no grounds to complain." Except I don't, actually.

tptacek15• 16 years ago

That's not the logic I'm employing, though I see why you think it is. I'd rather point out that those 26 other countries do not appear to suffer a deficit of academics like Mankiw, despite a much stronger incentive for them not to take similar speaking engagements.

Of course, the bigger flaw with Mankiw's argument is that it evades the point of those taxes, which is that they buy things that our society has deemed worth having. It is not totally outside the bounds of reason to suggest that we'd have less entrepreneurship if every potential business owner had to worry about providing for 100% of their parents medical expenses.

We cannot have everything we want. At some point, the goal of having the "Happiest Possible Greg Mankiw" will have to give way to something like Wildland Fire Management.

tici_88• 16 years ago

"While continuing to point out that the US has a lower tax burden than Denmark, Sweden, Belgium, ... Canada"

As far as Canada is concerned, this statement is false in certain cases. For example, the small business (income < 0.5 mln) corporation tax rate here in BC is 13.5%. This is combined state + federal, and will go down to 12.5% in 2011. The corresponding rate for the US is 40%, I believe.

Income taxes rates are also lower for certain income brackets. When they lowered taxes here a few years ago, the claim was that people making $90K/year face the lowest tax rates in North America. Here is a somewhat informative table of taxes paid for various income brackets: http://www.wolrigemahon.com/txrates.html.

Where the US makes up for lost ground though is through the myriad tax deductions that are sprinkled to various special interest groups, e.g. mortgage interest deductions, etc.

tptacek15• 16 years ago

It's not false in the aggregate; an equally fair argument would be to find locales in the US with miniscule property taxes and no state personal or corporate income tax (somewhere in Wyoming, presumably).

gojomo3• 16 years ago

In fact, many of those higher-tax countries do export their top academics and entrepreneurs to the US.

None are as populous, large, and diverse as the US -- so each may have an easier time (politically and operationally) centralizing and nationalizing services with consensus support.

But alternatively, why wouldn't we be getting economies of scale which make an equally high tax burden (as a percentage of GDP, which is the measure you seem to be using) unnecessary?

Also, the US is on average wealthier than many of those countries. Why wouldn't tax-funded goods and services -- being as they are for the benefit of people of all incomes -- be inferior goods, whose proportion of income should decrease as a consumer -- in this case, the nation -- becomes richer? We have a lower 'food burden', as a percentage of national income, than many countries -- yet few would argue we must increase that number for our national benefit.

The times of strong growth and high taxes occurred post-WW2, when the US had an uniquely unassailable competitive position, and much of the rest of the world had ludicrously high taxes, too. The whole world moved away from those peak rates; implying we could today have the same "unprecedented" world-beating export economy of the 50s/60s with similar ~70-90% top marginal tax rates would be insane.

tptacek15• 16 years ago

You're framing the debate in terms of the immediate postwar economy, but I could just as easily invoke the 1990's.

mmaro• 16 years ago

Out of curiosity, does anyone know what tax rates looked like in the 1800s? Zweig's 'The World of Yesterday' says it was in the single-digits in Vienna, but I'd like to have better numbers for more places.

tptacek15• 16 years ago

I don't know, but it's worth pointing out that the US in 1890 was so different from the US of today as to make that an apples/oranges comparison. To draw some somewhat relevant comparisons: in the 1800s your children might very well be working in a mill to support the family, and there was no such thing as a weekend.

subwindow2• 16 years ago

He's ignoring the fact that having Mankiw work less may be a good thing. If Mankiw makes that $1000 for an article, he'll sock it away and it won't get spent for 10+ years. If a starving writer instead takes the job, he'll spend it immediately.

I do not see the downside.

jamesaguilar7• 16 years ago

A few problems with your analysis.

- Money that is "socked away" in savings accounts or investment portfolios reenters the economy through lending or through decreasing cost of capital for businesses.

- It is inherently better for Mankiw to write articles than it is for starving writers to do so. If anyone derived value from what the starving writer was writing, they would be getting paid for it and therefore not be starving (generalization -- there may be a few cases of highly valued writers being paid almost nothing and sharing their works for free to a wide audience, but I'm not aware of such). In the common case, that means that we are paying the starving writer for producing ~0 value, and decreasing the value that Mankiw produces, resulting in an overall decrease of wealth for society.

The fundamental misunderstanding you seem to be embracing is that the function of any individual in an economy is to pass the money they receive in wages forward to the next person in the chain. But this is not so: from an economic perspective, value is lost when less overall wealth is produced, so it's important not to encourage people in pursuits that hold no value to society as a greater whole. For example, society ought not pay artists that produce nothing other people want to look at for their services, nor should society pay programmers who produce software no one uses. On the other hand, society should avoid decreasing the output of those whose work is valued highly, like Mankiw's.

(If you derive some perverse value from having money wasted, then it would of course be fine for you to pay starving artists, but I'm arguing that society as a whole through the government should not.)

hdctambien• 16 years ago

Isn't the problem right now that people aren't spending money, though?

Banks have plenty of money to lend (see the TARP and the Fed throwing money at them). Companies have money to spend. Neither are doing anything because the economy isn't churning because people aren't spending their money. They either have no money to spend (the unemployed), or they are saving their money because they don't trust their company to not fire them/the government to not tax it away.

Today, what it seems we need is money going to people that would buy things from companies so the companies will hire people to make more of those things. And then more people can buy things from companies.

Once the economy is working again, then we can worry about rich people earning extra money and putting it in the banks for them to loan out.

subwindow2• 16 years ago

The problem with the economy right now is not that there isn't enough money to fund corporations, it's that the average person isn't making enough regular income.

hexis• 16 years ago

Savings with a bank would typically continue to circulate in the loans the bank makes. Even if one were to hide money under a mattress, the effect would be very, very slightly anti-inflationary (by withdrawing currency from the market), which anyone else with savings, or just cash, would appreciate.

spamizbad• 16 years ago

> He's ignoring the fact that having Mankiw work less may be a good thing

Indeed. His tenure in the Bush administration was mediocre. Then again, he could be a great public speaker.

wiredfool• 16 years ago

Yet, here's an article, which presumably he got paid for. Perhaps the value in the article to him is more than what he got paid for? Or perhaps his premise is wrong. (Yeah. I'm calling a Harvard Economist wrong.)

Comparing the untaxed value + 8% over 30 years to the taxed value is a straw man. I could push that horizon out another 30 years, and the 'marginal rate' would get worse. I could shorten it and it would get better. It's a meaningless number. Also, no company pays a 35% tax on the returns to their stock, they pay 35% on taxable income. There's a huge difference. Unless he's planning on dying soon, (which he's not, because of compound interest assumptions) there's no way he can tell what the estate tax is going to be. It's a crapshoot.

Roughly, the marginal change of the rollback in taxes is going to be a couple percent, though he talks about the new percentages, not the old. The net marginal change is going to be tens of dollars. If that's enough to keep him from writing articles like this, bring it on.

pandafood4• 16 years ago

Arguing against higher taxes because they discourage people from working is like arguing against jailing people for drug offenses because it overcrowds jails. It could be right (though in the case of raising taxes, history doesn't seem to bear this out), but it's not the real reason that we shouldn't want to pay higher taxes. The reason is that they do bad stuff with our money. There's a sense in which it can be said that all of your tax money goes towards paying down interest on the national debt, but if you take a look at what that debt is for, you'll likely be unhappy. If we (the people who don't want to pay higher taxes) pretend that it's for some reason other than it is, we put ourselves at risk of being told that our made up reason is stupid.

mquander• 16 years ago

People who want higher taxes don't agree that they do bad stuff, or they wouldn't want higher taxes.

pandafood4• 16 years ago

There are those people, and there are the people that don't know about the bad stuff. Actually, to be fair, there are also the people who know about the bad stuff but dont think lowering tax revenue is a good way to get them to stop doing the bad stuff. I think the first group of people might have a strange set of values (unless you mean that they don't think the net effect of what the government does with taxes is bad, in which case I agree with them), but it's still worth arguing about to convince the second and third groups.

aniket_ray• 16 years ago

Do Americans have to pay income tax whenever value of stock appreciates (even if he does not sell in the market)? I doubt it. Since valuation of stock would vary.

Here in India, the only tax Mankiw would have to pay is when he sells the stock after 30 years and gets a capital gain. So, he would still have an effective 8% compound rate. So he would end up paying tax on $10000. Assuming 30%, he would still keep $7000.

CoreDumpling2• 16 years ago

Not when stock appreciates, but you get taxed each year on dividends and interest paid out by investments. That is how I end up paying taxes on my investments every year, which still have unrealized losses of 35% or so.

mikeryan2• 16 years ago

So if you are

A. Making over 250,000 a year

B. Not planning on spending additional income yourself, but instead planning to save that money for your children when you die.

C. Have opportunities to make (relatively) small incremental chunks of income.

D. Have the ability to sock away money at a 8% compounding rate.

It might not be worth your while to take on additional work. And this is entirely on Obama for letting the tax cuts to the $250K+ income families slip.

jshen• 16 years ago

for the counter argument, http://news.ycombinator.com/item?id=1777366

loumf2• 16 years ago

Obama cannot do anything about tax rates -- the 2001 congress passed a temporary tax cut which Bush signed. Whatever you think about the tax-rates going up was decided 10 years ago to dodge CBO projections of cost by Bush and that congress.

kschrader• 16 years ago

Does anyone else find the entire premise flawed? If all he wanted to do was maximize the amount of income he's going to pass on to his children then he would be an investment banker, not a Harvard professor/author. Any bank would take him in an instant.

Trying to make it sound like $1000 is the only incentive in play here seems like a mild distortion at the very least.

jseliger2• 16 years ago

If all he wanted to do was maximize the amount of income he's going to pass on to his children then he would be an investment banker, not a Harvard professor/author.

The question is whether he'll act at his present margin (http://en.wikipedia.org/wiki/Margin_%28economics%29) , not whether he's spent his entire life trying to maximize one opportunity.

In any event, his bigger point is that a lot of service professionals in particular (think doctors, lawyers, consultants) will make decisions based in part on tax rates. For example, ten years years ago my parents routinely basically stopped working in mid November when they hit the top marginal tax rate essentially because the cost of work got too high (we do grant writing for nonprofit and public agencies, if you're curious: http://blog.seliger.com). A lot of people have a fair amount of discretion in the amount of work they do, and if you tax them a lot on the last 10 – 30% of income... they'll probably choose to consume less of it.

This is related to the backwards bending labor curve: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=gls&c=dsp... .

I assume people have done research to examine how large these effects are in the real world, but I don't know of any off the top of my head. I would also guess that the effects change in the short- and long-term.

aarghh• 16 years ago

The fundamental fallacy here is that people respond purely to monetary incentives for work. This may be true for Mr. Mankiw, but it is not a universal truth.

rythie• 16 years ago

If that were true wouldn't he just do the extra work for free, then he can take his pick of the very best/interesting jobs that way. The government would take most of it in tax anyway as he points out. Of course the downside to the government is that it doesn't get all that tax revenue.

If a friend said to me, can you talk at this conference, I'll pay you $1000, but really money is tight and then I say I'll only get $100 of it out anyway - then I'm just going to say wave the fee aren't I? Assuming I want to do it.

Or even just give the fee directly to charity? (at least in the U.K. this avoids tax)

philh• 16 years ago

I don't think anyone's making that assumption. The argument holds if people respond at all to monetary incentives for work.

And if you find someone who doesn't respond at all to monetary incentives for work, they probably aren't making $250,000 a year, or anything close.

rikthevik• 16 years ago

My girlfriend works 4 days at as a pharmacist. Her income for working a fifth day puts her into a high tax bracket in British Columbia and results in her making dramatically less money for that day. So she uses that time to develop herself personally and work on side projects.

I wonder if a flat income tax could ever work. No more bitching and whining - everyone pays the same percentage of their income and that's the end of it.

jseliger2• 16 years ago

This is some of what I describe here: http://news.ycombinator.com/item?id=1777371 . Thanks for another example of it.

zdw2• 16 years ago

A flat income tax percentage would work if we could all pay a flat percentage for all our basic needs like food and living expenses.

For extra credit, explain why all of the above doesn't make sense.

Teckla• 16 years ago

If the Bush tax cuts for the wealthy are extended, it means the U.S. must continue to borrow greater sums of money than it otherwise would have to, in order to pay for those extended tax cuts.

This is one area where Democrats and Republicans should agree. The Bush tax cuts for the wealthy are simply not fiscally conservative.

The author expresses concern about the future for his children. Perhaps the author should consider that his children will have a higher tax/debt burden in the future if the U.S. keeps borrowing so much money.

edderly• 16 years ago

If you treat this as a statement of fact, the economic consequence of this is clearly a matter of interpretation. The fact that Mr Mankiw might not be providing labor may mean that others will simply do the task and pay money on their earnings instead.

zdw2• 16 years ago

The unstated fundamental assertion of this is that people only work because of money, and to amass huge sums of it to pass on to their heirs.

Personally, I work because I enjoy it and am passionate about what I do. If I come out ahead and have money to survive and buy a few modest luxuries, then I'm happy.

If you don't like what you do and work is a pain, but you're addicted to the money stream, something is very wrong.

Similarly, having a society where people don't have the opportunity to better themselves is also wrong - and that's where government can and should attempt to improve the system.

lkrubner2• 16 years ago

From what I've seen, some people have an in-born desire to work hard, and some don't. Taxes do not change this. The emphasis on taxes strikes me as a bit of posturing, and a ridiculous one at that. I've never had a single acquaintance say to me, "Yes, I've worked 70 hours a week these last few years, but they are raising nominal rates on my top brackets this year, so I will only work 50 hours a week from now on." Humans just don't work like that.

In my head, when I'm dealing with people, and especially when I'm hiring people, I slot them into 1 of 4 groups:

1.) ambitious - will do whatever it takes

2.) guilt ridden - aims to please, will make sacrifices for the job, though they can slip into burn out or depression

3.) multiple agendas, balances family and a job, stable but not extraordinary, will sometimes work extra in emergencies.

4.) unmotivated - their interests are away from work - hobbies, romantic partner, children, drug addiction, travel, art, writing, health problems - whatever, the issues are legion, but the point is the same - work is a low priority for them, they give it the minimal effort needed.

None of these categories change based on taxes.

For my part, I enjoy working, and that enjoyment wouldn't change if my taxes went up or down.

Possibly there are a few people, at the margin, who really are influenced by the tax rate, but I suspect this is a rare taste, like people who like yak butter. After all, you have to be willing to spend an inordinate amount of time studying the tax code before you can figure out how changes in work habits will effect your total tax bill over the long term, and few people are willing to make that effort. Hell, most people are not even willing to study their own investments, and leave all investment decisions to some advisor, or simply go with an index mutual fund, so that portion of their lives can function on auto-pilot.

I do not think I've ever known anyone who changed their work habits due to changes in the tax code.

WalterBright• 16 years ago

I do know people who figured out their marginal hourly rate after taxes, and decided to cut back their hours worked to stay under that.

When figuring the hourly rate, one must take into account not only taxes, but loss of unemployment compensation, earned income credit, etc. There are definitely folks who do this and choose to work less because their net hourly rate is not compelling.

lkrubner2• 16 years ago

Well, like I said, "I suspect this is a rare taste, like people who like yak butter. After all, you have to be willing to spend an inordinate amount of time studying the tax code before you can figure out how changes in work habits will effect your total tax bill over the long term, and few people are willing to make that effort."

Anechoic3• 16 years ago

What I don't like about Mankiw's logic is that he's only looking at part of the picture. He talks about being ble to save $1,000 without taxes vs $523 with taxes. Fine, let's look at the $1,000 - now how much of that $1,000 will he have to spend to fix damage to his car's suspension system caused by crumbling roads? How much will he have to pay for private schools because the public schools suck? How much will he have to pay for home security monitoring because the police and fire fighting services have had cutbacks? How much will he have to pay to repair the water damaged caused when a nearby 50 year-old water main broke and flooded his house?

We can go on and on - there is certainly a cost in paying taxes but there is also a cost in not paying taxes. People seem to forget that an interstate bridge collapsed a few years ago.

waterlesscloud• 16 years ago

Can we please stop bringing police, fire, roads, and schools into every single discussion on taxes?

We all know that's not all governments spend money on. We all know there's a good deal that could be cut before these basic services are cut. We know that, so why do we insist on pretending otherwise?

Anechoic3• 16 years ago

We all know that's not all governments spend money on

"Police, fire, roads, and schools" are the things that affect and impact every US citizen most everyday, so it's fair to consider them. But of course governments spend money on other things - governments in the USA spend money on welfare (using the term in it's broadest sense), military/defense, health, national park, R&D in a variety of areas, interest payments, science, search & rescue, libraries/museums, workplace safety, courts, arts, media, and so on.

Yes, any of those can be cut before hitting basic services, but my premise hasn't changed - cutting most (if not all) of these will still result in a cost for individuals that people generally don't factor into what they perceive to be their in-pocket money in a no-tax/lower-tax world.

tptacek15• 16 years ago

Mostly, what we spend money on is services for retirees. Then national defense.

This is highly relevant to the discussion --- moreso than fire, police, roads, etc --- because without a social safety net guaranteeing some minimal standard of living (and, particularly, health care) for our close relatives, many entrepreneurs would be forced to optimize their careers to the benefit of their relatives.

You have a point. Unfortunately it wounds the larger argument I presume you're trying to support.

jonallanharper• 16 years ago

You seem to think that $10 out of $10 in taxes goes directly towards roads, schools, or whatever. In reality, about $2 out of the $10 is actually spent for the those purposes.

$6 out of the $10 is a dead weight loss... completely consumed by government waste and inefficiency. The remaining $2 of the $10 is effectively transferred to bank accounts of politicians & friends via bribes, political donations, and outright theft.

tptacek15• 16 years ago

Six dollars out of every ten dollars spent by local, state, and federal governments are dead weight loss? Cite a credible source, please.

jab• 16 years ago

Bullshit. Got a citation for those figures?

Anechoic3• 16 years ago

You seem to think that $10 out of $10 in taxes goes directly towards roads, schools, or whatever.

I never said anything about the direct allocation of tax dollars.

$6 out of the $10 is a dead weight loss... completely consumed by government waste and inefficiency.

Of course there is waste in government spending, just as there is in private spending (hey, we just can't get around the laws of thermodynamics). But do you have any (reputable) sources to back up your assertion that 60% of government spending gets lost as "waste and inefficiency"?

sshumaker• 16 years ago

Dear Mr Mankiw,

You may be a Harvard economist, I'm glad you're not my accountant! You've gone out of your way to maximize the tax penalties you'll incur in your goal of paying for your children's education. Perhaps you should take that 1000$ and find a decent financial planner. As a starting point, how about just investing in an index fund, taking long-term capital gains, and writing a check to pay for your kids' college?

TYPE_FASTER• 16 years ago

Couldn't he use a LLC to avoid the estate tax? His whole argument seems overly simplified to point of being incorrect to me.

Is he talking about investing in a company that's growing 8% or is it his investment in the company that grows at 8%?

The corporate tax rate of 35% is another example. Does revenue from Google UK count towards the total revenue for Google? If so, then since Google's UK headquarters are in Ireland, the corporate tax on that revenue is more like 12.5%, unless it gets taxed again by the US.

d2viant• 16 years ago

As far as I'm aware, the revenue generated by a foreign subsidiary is not taxed again by the US until it enters the US economy. So long as it stays overseas we don't touch it. It's interesting to hear people note the record amounts of cash that US companies have on hand right now, but much of that is in foreign accounts and can't be brought into the US without paying a huge tax on it.

danielsoneg• 16 years ago

Ok, a couple points here:

First, he's talking about the total effect of the taxes, not the marginal effect of the new taxes. Aside from being against the economist's gospel, it's also disingenuous. His tax rate isn't Zero now, it's 36%. He gives some lip service to this later, throwing out the $2000 number without really justifying it, and he doesn't mention the degree to which those taxes have gone up, just what their new value is.

Second, he gets REALLY sloppy when talking about the corporate taxes. It's along the same lines as the first problem - he's talking overall rates, not rates of change, but it's really egregious there - the 8% returns he's talking about at this point are total fantasy.

Third, and this isn't necessarily a problem with the article, just its overall premise - As a society, we may get more use out of taxing Mr. Mankiw more than we would out of his limited-reach speaking engagement. Assuming he makes $500k, a number I'm not even going to try to justify, except to say the other poor bastard of a professor who jumped into this arena was making along those lines, increasing Mr.Mankiw's taxes by 3.6% yields an additional $18k in federal income, which can be diverted to more broadly useful expenditures than hearing an economist talk. The question to me isn't "Will Mr. Mankiw work less?" - let's assume there is something of a depressing effect on his outcome - the question is, "Is this a tradeoff we should make?"

Finally, I'd point out that Mr. Mankiw's kids will also be able to make use of the services and institutions paid for by his tax money - this isn't a zero-sum game. He and his kids live in the country where his tax money gets spent. If he doesn't like what it gets spent on, well, join the club, buddy, but that's a different argument.

MaysonL4• 16 years ago

For an interesting comment, see Brad DeLong's "Greg Mankiw Quits the New York Times?": http://delong.typepad.com/sdj/2010/10/greg-mankiw-quits-the-...

loumf2• 16 years ago

If this article is indicative of the content of his speeches (purposely misunderstanding tax policy and misleading with math), then I'm relieved that he intends not to speak publicly.

daltonlp• 16 years ago

Well if it isn't Mister Galt :) Nice to hear from you again!

http://en.wikipedia.org/wiki/John_Galt

Greg Mankiw: I Can Afford Higher Taxes. But They’ll Make Me Work Less.

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