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[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."
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.).
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.
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I'm with Billy from BillyBlog here, in welcoming Mankiw's commitment to work less if he is not granted further tax cuts. Seeing as his work mostly consists of teaching and writing textbooks about silly algebra that pretends to model the political economy without actually doing so, his work has a negative marginal value for humanity as a whole - even though I'm sure his employers manage to find value in his agit-prop.
- Jake
Right, Jake. In addition to opening up opportunities for others, it spares us more of the same stuff from Mankiw. Double benefit of his not taking those additional opportunities!
It's probably also worth pointing out that he claims a return of 8% in the current world, which drops to 5.2% in the after-phase-out world. Except that his corporate investments are already paying corporate income tax (whether at 35% or not), so there's no reason their return would drop after 2010. If he's getting 8% now, he should continue to get 8% then, although he'll pay taxes on that 8% at a slightly higher rate.
The question is not about "Mankiw", or whether he will or will not work more but in fact about how "Mankiw" will spend the money he keeps vs. the government. It is not a moral question it is an economic question and that question is: Which course of action will in aggregate benefit the economy the most. You may view "Mankiew" with comtempt or from a lofty moral perch and you may have strongly held opinions as to where the money should go but what is the reality of the above question?
Tom Young
Tom--Nothing in my comments suggests contempt for Mankiw, and my post answers the economic question. I may get tired of hearing weak justifications presented as strong ones, but that isn't personal contempt. As for his position here, his assessment of the situation is unrealistic, since his answer is inconsistent with his stated goal.
I've shown various reasons why his arguments against higher taxation of the wealthy don't hold water. In the process, I've provided a number of arguments for why higher taxation of the wealthy may in fact be beneficial to the economy (better allocation of resources, incentive to work more in order to achieve the desired monetary goals, etc.). The economic question is the question this post deals with, not any moral question. The fact that the relinquishment by the "stars" of some of their opportunities may result in opportunities for those who have been discriminated against in the past is a moral good that goes along with the economic good of more competitive allocation of those opportunities. It is also quite likely that more even distribution of resources resulting from higher taxation is both economically good (creating more growth) and morally good (resulting in better standards of living and more fulfilling lives for more people than in an oligarchy).
Thanks, Linda, for your usual well reasoned arguments against Mankiw's doctrinaire rantings. Many of your points had occurred to me on reading the article, particularly the "market based" next-to-the-last paragraph, but you're so much better at stating the obvious than I am. Certainly if the highest paid choose not to take all the available opportunities, then somebody else WILL choose to.
Isn't that the beauty of markets? Some people will make choices that others won't!
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