The people are upset at Greg Mankiw

by on October 12, 2010 at 6:32 am in Economics, Philosophy | Permalink

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.

I also view Greg's column as a chance to learn.  What comes to mind are two possible defenses of our tax system-to-be:

1. In reality, eveyrone has a short time horizon, driven by short-term ego rewards and thus such high long-term tax rates can work.

2. The tax system will be an efficient means of price discrimination.  The people with truly long time horizons can work around some of the high rates, especially for estates.  The people with short time horizons will pay up and those are the same people whose labor won't be much deterred.  (There is an interesting discordance in that Greg claims to belong to one camp but some of his critics wish to put him in the other.)

The second claim seems more plausible to me, but they're both worth thinking about.  Neither, in my view, removes the moral issue.  

There are plenty of encoded status claims in Greg's initial piece, and perhaps that is one reason why it induced so much hostility.  I say keep your eye on the ball, filter out the analytically irrelevant social information, and consider that, even if you wish to raise taxes on the wealthy, that a ninety percent marginal rate — even at a non-universal margin — is a sign that something really is amiss.

Addendum: Andrew Gelman comments, and again.  And here is Reihan Salam.  And here is Ryan Avent.  And here is Greg's response.

Andrew October 12, 2010 at 3:56 am

The people who are upset are douchebags. I AM being polite. They might get a couple more circle jerks off before November and then '12. They make asinine comments like 'As you all know, we blog for free.' They think money is fundamentally different from other utility. It is! It is really easy to tabulate and take away from the people who have it. That's one reason they don't get it. It's harder to take away a bicycle form a naked San Franciscan, even though they enjoy it quite a lot (while it does little for anyone else, but that's okay, because they are poor).

If they were at all thoughtful, they'd realize they are really mad at themselves. We are pissed off at what their policies have given us in return for our money. But rather than look at the policies that have screwed this country and wasted resources, they think they understand what each person's utility function is. They try to tell Henderson…ahem… Mankiw how they should live and spend their money and be happy with what the government allows them to have. Gelman's take, for example, sounds good, but he makes the fundamental error in assumption that Mankiw is talking about Mankiw. These guys must think that corporations are outsourcing and sending capital overseas so that the executives can spend more time with their kids. Sure, decision-making is hard, but errors tend to average out to the marginal effect. And that they are hard doesn't justify making planning even harder.

So, where are we at with the estate tax anyway?

matt wilbert October 12, 2010 at 4:43 am

I agree with the previous comment. I also don't think we have reliable moral intuitions about people's discount rates over 30 year periods. I personally have no idea whether a 90% haircut on a child's inheritance is immoral, and of course that specific number is very sensitive to estimates of investment returns and discount rates.

Zach October 12, 2010 at 4:51 am

A 90% marginal rate would be too high, but Mankiw's rationale underlying that calculation, even against a no-tax alternative, are absurd*. As you note in your post, he knows that this is not the tax rate he'll be paying because of estate tax loopholes. There are also a number of tax-free or low-tax vehicles that he could invest his $1k in in the meantime. His calculation is also heavily dependent on this:

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains.

This is just nonsense. Any investment yielding 8% won't be pegged directly to the corporate tax. If that were the case, it'd be a no-brainer to axe the corporate tax entirely. If corporate earnings (let alone valuation) scaled with corporate tax, their payrolls would scale in a similar way. Income and payroll taxes account for several times the revenue from corporate tax.

I agree that he's free to make the case that, compared to the status quo or a no-tax situation, he's affected by marginal tax rates, but inventing facts to exaggerate his case isn't much of a chance to learn.

*I am a physicist and not an economist; I'm sure some of this is wrong.

Firionel October 12, 2010 at 5:06 am

"I also see that if a person runs a successful small business [...] that person faces a very high marginal tax rate. In one of Greg's examples it's about ninety percent."

That's precisely the point, it's just not true. There is no ninety percent marginal tax rate. To get to that number Mankiw has taken taxes paid by him, by companies he invests in, and by his children, and argues that he himself is the one paying all of them. This is interesting, because it means (since taxes can only be paid once, no matter how high) that his children face a 0% tax rate on their inheritance.

Moreover he does no recalculation. That is decidedly un-economic. You'd think that a switch from no tax at all to 90% tax rate would make him rearrange his consumption. That is an important difference, since by choosing to leave all his marginal income to his children, he consumes a good that is taxed very highly (at least for those college professors amongst us leaving several million dollars). By at least partially substituting this consumption, he could massively lower his tax burden. That would seem to be an important point "about efficiency"

Oh, and one more thing. As 'a' pointed out in the comments to the previous post on the matter: If you believe in Ricardian Equivalency, then changing the tax code to lower your personal tax rate is basically saying that the government should give you somebody else's money (over the status quo).

We can argue all day long about the right tax rate, and I can see plausible arguments for lowering tax rates as well as raising them. For crying out loud, I am not entirely unsympathetic to libertarian arguments on this matter. It's just that Mankiw's editorial is shedding more darkness than light, and he ought to know better.

dcpi October 12, 2010 at 5:20 am

This is one of the comments over at the Mother Jones blog. How does one even start to reason with this line of thought that starts with assumptions that are so far from being universally held?

Here's how I see the world. I'd be interested in hearing your world view. Humans cannot exist without society, anymore than a human organ can live outside the human body. Government is analogous to the human brain. That is where the ultimate decisions are made. No human society can function without government. People depend upon government, just as government depends upon private businesses. It's a reciprocal relationship.

When you say that Mankiw would be working for whatever medium of exchange existed, you act as though there can be some medium of exchange outside of government. But that seems highly speculative, and probably wouldn't work for a good reason. What do you have in mind?

If you look at the big picture, Mankiw has a better life than most people. Yet you are angry because he pays more than his share in taxes. I am angry because he gets more pay than he deserves. His net income available for consumption is out of proportion to his contribution to society. Ultimately, it is work and consumption that matter, not income and taxes. Income and taxes are the means by which the brain controls the body, not ends unto themselves.

Perhaps we need to teach people that government, its institutions and form are not analagous to society? That is why governments and constitutions do not cross nations and national character tends to be "sticky" even as governments, kings and emperors rise and fall.

Should it also be taught and stressed that people differ? Though some of us wish to be part of a community, others are content to live the life of a hermit or wanderer. Some wish family, others enjoy singleness, etc.

In our society, at the least, many people feel they are able to make their own decisions; they are not looking for decisions made by a "collective brain." Then again, it appears some are. But what moral right do they have to impose their needs and wants on their neighbor?

At least with individualism one can ignore the other. Collectivists must force the other to comply.

Andrew October 12, 2010 at 5:28 am

dcpi, you got it.

I've identified something else I hate about Paul Krugman. It's not that people don't want jobs and are prioritizing leisure (as he would strawman in order to ridicule). It is that these people haven't given us an economy as much as they've given us a monetary system that is the equivalent of a hamster wheel. They want us as self-unreliant as possible so that they can always whip us into more activity through inflation.

When someone like Henderson…ahem…Mankiw starts to vaguely feel this, the sycophants of the system go apeshit.

dearieme October 12, 2010 at 5:50 am

I suppose that if someone gives you the advice "Don't just go for the best paid career, go for something you'll really enjoy" he is, amongst other things, advising you to replace taxed rewards by untaxed.

AC October 12, 2010 at 5:57 am

Anyone else think "oooh, burn!" whenever Tyler reduces noble-sounding arguments to monkey-like status gibbering?

Morten October 12, 2010 at 6:01 am

One more argument Mankiw is making (implicitly) is that there is no tax incidence of corporate taxes. So any change in the corporate tax rate is 100% borne by capital. None by workers. Good to know Mankiw (and Cowen?) believe this next time this issue comes up.

Tracy W October 12, 2010 at 6:12 am

Master of Nona: We want a system that rewards hard work, not one that rewards random luck (i.e. who your parents are).

So why does anyone leave any money to their children?

I think what's going on is that you might want a system that rewards hard luck, but many other people want a system where their own children get special rewards. Be that the best education money can buy, or a large inheritance.

This can be seen in the UK, where politicians have campaigned against private schools and then sent their own kids to private schools.

There's no one "we" with a common view. If Mankiw is motivated to work by the thought of leaving more money to his kids, then that's what he is motivated by. You are welcome to disagree with him and think that he is wrong, but it's silly to start thinking that he agrees with you if he doesn't. And, while Mankiw individually doesn't matter for total tax take, if a lot of people agree with Mankiw then higher taxes might reduce work, no matter how much you think things should be differently.

It's ludicrous include the 30 years of interest lost on that 48% as part of the "tax rate" you're paying today.

Why? If what Mankiw cares about is the post-tax money his children will have in 30 years time, then that should be exactly what he cares about.

The trade-off between saving and spending is a personal choice.

And Mankiw's point is that his own personal trade-off is, given current taes, more towards spending his time on leisure.

Zach – Mankiw says this is about marginal rate, he's already utilising the existing legal and practical ways of avoiding taxes. See http://gregmankiw.blogspot.com/2010/10/response-t

When you say "Any investment yielding 8% won't be pegged directly to the corporate tax. ", what do you mean? What did Mankiw say that implied that such an investment would be pegged to the corporate tax? Isn't it that the company earns the profit and then pays taxes on it?

If corporate earnings (let alone valuation) scaled with corporate tax, their payrolls would scale in a similar way.

I don't follow you again. Who is arguing that corporate earnings scale with corporate tax? Post-tax corporate earnings are inversely responsive to corporate taxes – the higher the tax as a proportion, the lower the post-tax earnings, but that's separate to corporate earnings. And why would payroll taxes scale with corporate earnings? Couldn't a company have a high payroll, but low earnings, say if they're overpaying their staff? Or a low payroll and high earnings? Or a low payroll and low earnings (say if they're mismanaging their staff, or if they have a lot of capital tied up?) And how does this link to anything Mankiw said?

but inventing facts to exaggerate his case isn't much of a chance to learn.

Are you sure that he invented facts? You appear to be saying a lot of stuff that Mankiw didn't mention.

Firionel: To get to that number Mankiw has taken taxes paid by him, by companies he invests in, and by his children, and argues that he himself is the one paying all of them.

Not quite, he's saying that his choice of whether or not to work is affected by all these tax rates, because what he cares about is the post-tax money his children get.

Moreover he does no recalculation. That is decidedly un-economic

Um this is just false. To quote him: "Is it any wonder that I turn down most of the money-making opportunities I am offered?" So he's turning down work, because the high taxes make him reclalculate and decide that leisure is more valuable.

That is an important difference, since by choosing to leave all his marginal income to his children, he consumes a good that is taxed very highly

Again, you missed the bit where he said that he doesn't work, he doesn't accept the job. He switches from a good that is taxed very highly (leaving all his marginal income to his children) to a good that is taxed much less, leisure. That's the whole point of the article.

If you believe in Ricardian Equivalency, then changing the tax code to lower your personal tax rate is basically saying that the government should give you somebody else's money (over the status quo)

Nope, there's another option, the government could lower spending.

It's just that Mankiw's editorial is shedding more darkness than light, and he ought to know better.

Mankiw probably was foolish to think that writing a newspaper column about taxes would cause people to read his arguments and respond to them, instead of totally ignoring said arguments in favour of making up stuff to make Mankiw look bad. For example, some people have read his column and thought that he was doing "no recalculation", totally ignoring his clear statement that he was turning down many money-making opportunities he was offered. Those sorts of people are shedding more darkness than light.

But the implied conclusion – that Mankiw should totally give up on any attempt to have a naunced conversation, because some people are going to misrepresent his arguments, is a depressing one. Do you really want that? And would you be happy to have such a rule applied to people you agree with? That rule being that, if anyone could possibly misunderstand or misrepresent your argument for political purposes, that argument shouldn't be made?

Greg October 12, 2010 at 6:29 am

Oh no… Brad DeLong is upset! The horror!

Who cares… Same with Thoma. I'm sick and tired of their squawking everytime someone writes something they modestly disagree with.

We get it already. You think taxes should be higher and that it will have nothing but a positive influence on the economy. Go sell crazy someplace else…

Firionel October 12, 2010 at 6:35 am

@Tracy

Hmm, I think you might have misunderstood me. I'll try and adress your criticisms shortly.

First off, I stand by my point about him conflating all kinds of different people's taxes into his own without qualification. By doing so he arrives at something that only few people conventionally would call the marginal tax rate. Yes, other people's tax rates influence my consumption, but really getting into that probably is fruitless, it is a way more complex phenomenon than standard theory can handle at this point. (E.g. many people care about the share of revenue, at say a restaurant, being taken home by staff as wages. But saying that I am paying their payroll tax is ludicrous.)

For my problem with the recalculation thing, think about inflation measurement. Basically Mankiw is constructing a 'utility index' with taxes and without taxes. But he is using a Laspeyres-Index to do that. And given that the 'price change' from a no-tax-world' to a 'post-Bush-tax-world' is massive, this produces a massive error. This is a systematic mistake.

Your point about the Ricardian Equivalence is perfectly right of course, but since I don't see Mankiw arguing for lowering spending (much less making at least somewhat specific suggestions), I think it was a valid point to make – albeit a tad polemical (I don't think you'll want to cast the first stone there, though).

@Bill
I had been thinking about the MPC=0 thing, but ultimately I think it's of no consequence in this context. Mankiw is mainly arguing fairness and the added social value of his work, and MPC doesn't enter into that argument, although it is of course an interesting side avenue…

Cynic October 12, 2010 at 6:44 am

.9 is neither a moral value or immoral value.

However, dismissing "irrelevant social information" could have some moral implications…

anon October 12, 2010 at 6:59 am

Could someone explain to me how comparing 2011 tax rates to zero tax rate makes sense instead of comparing 2011 to 2010 rates? I've only studied economics up to the graduate level, so I'm clearly a layman, but this seems absurd.

Under no possible scenario is Mankiw facing zero marginal or average tax rates. This is just not an option in his decision tree. Also, this ignores that taxes are at some level a payment for services. Therefore, comparing to a zero tax scenario is incorrect unless you also attempt to package in the associated reductions in services. (i.e. no army, no social security, no fire department, etc.)

By analogy, comparing to a zero tax rate is like saying "would you like this new car for $20,000 or for free?" There's an obvious answer, but it's not really informative.

What am I missing?

gascon October 12, 2010 at 7:08 am

"It's ludicrous include the 30 years of interest lost on that 48% as part of the "tax rate" you're paying today. The trade-off between saving and spending is a personal choice."

Sorry, but any rational person needs to include this kind of thing in their decision-making. If Mankiw is playing social planner for himself, his kids, and his businesses, and looking down the corridor of time at all the taxes that get paid out, there's nothing wrong with that. Acting like he's a dumbass for taking into account the impact of taxes on his savings is what an intelligent person does.

That "the trade-off saving and spending is a personal choice" is such an insane claim I don't even know where to begin to refute it.

Zach October 12, 2010 at 7:25 am

@Tracy

When you say "Any investment yielding 8% won't be pegged directly to the corporate tax. ", what do you mean? What did Mankiw say that implied that such an investment would be pegged to the corporate tax? Isn't it that the company earns the profit and then pays taxes on it?

Mankiw's claims that his hypothetical investments earn 8% and that, with the corporate tax, they will earn 5.2%, or 65% of 8%. Is there a single investment vehicle with a probability of this high of a yield that performs exactly inversely to corporate tax? The 8% number he uses is more or less the number folks say (or liked to say in the mid/late-90s and whenever Social Security privatization is discussed) is what you get with a long-term, diversified investment in equities. If the growth rate of equities were raised by 2.8% by axing the capital gains tax, you'd see firms growing by that rate, incomes rising by that rate, individual capital gains increasing, etc. This would lead to a much larger increase in revenue than what was lost when you dropped the corporate tax.

If Mankiw happens to have a low-risk investment yielding 8% in dividends, he should include that in his replies post.

Tracy W October 12, 2010 at 7:33 am

Firionel: First off, I stand by my point about him conflating all kinds of different people's taxes into his own without qualification. By doing so he arrives at something that only few people conventionally would call the marginal tax rate.

Well then, as far as I can tell, you're standing by something that is wrong. What Mankiw said was that he cared about how much post-tax money his children eventually got, not that he was paying all those taxes directly. I notice you don't point out any quote from Mankiw that supports your argument that that's what he said, despite your eagerness to stand by it.

As for it not being conventional to call something the marginal tax rate, so what? If it's affecting Mankiw's work-leisure trade-off then it's affecting his trade-off regardless of how unconventional it is, if it's affecting a lot of other people's trade-offs then it's important regardless of how unconventional it is. There was a time when democracy was unconventional, there was a time when relativity theory was unconventional, and now they're entirely conventional. I see no reason for restricting conversation and writing to entirely conventional ideas, indeed I read in part to come across new, surprising ideas and would find a world with only conventional ideas in it dead boring.

Yes, other people's tax rates influence my consumption, but really getting into that probably is fruitless, it is a way more complex phenomenon than standard theory can handle at this point.

Umm, before we go down this path, Mankiw was talking about how tax rates affect his work effort, not his consumption.

E.g. many people care about the share of revenue, at say a restaurant, being taken home by staff as wages. But saying that I am paying their payroll tax is ludicrous.)

Okay, leaving aside that Mankiw didn't say he was paying all those taxes, instead he said that they affected his work effort, well yes it's ludicrous to say that you're paying their payroll tax, unless you're the only customer of this hypothetical restaurant, which seems unlikely. However it's not ludicrous to say that the customers of a restaurant pay the staff's payroll taxes. It's not necessarily right, it depends on the incidence of the taxes, but I certainly think it has merit as a first stab at it, and in one sense of course it's true, in the long-run, the customers are where the money comes from. If the owner can't earn back their payroll and the capital they've got invested in the business, from money from the customers, they're eventually going to stop owning a restaurant.

For my problem with the recalculation thing, think about inflation measurement.

Interesting, my problem with the recalculation thing is that you said that Mankiw wasn't doing it, ignoring that Mankiw blatantly said he was doing it – he was shifting from work to leisure. I think it's pretty silly to worry about inflation measures before you've even got basic reading comprehension right.

Your point about the Ricardian Equivalence is perfectly right of course, but since I don't see Mankiw arguing for lowering spending

Perhaps this was because of tight word limits on a newspaper column? An attempt to focus on one key idea?

I think it was a valid point to make – albeit a tad polemical (I don't think you'll want to cast the first stone there, though).

I don't object to people being a tad polemical, unlike you I like unconventional arguments. I do object to people making up strawmen, rather than dealing with the actual arguments in hand. I particularly object to people making up strawmen, and then asserting that the writer was "shedding more darkness than light, and ought to know better".

Again, if you think that Mankiw should not have made any argument that could be misinterpreted, would you agree to having such a rule applied to people you agree with? That rule being that, if anyone could possibly misunderstand or misrepresent your argument for political purposes, that argument shouldn't be made? I notice you didn't answer that question.

Alan Gunn@ – that's a good point, but a very difficult one to get around. If you lower the rate at which benefits withdraw you wind up with an expensive system because it covers a lot of people. If you cut benefits' levels in response to the higher rate, then obviously that's painful for poor people. There's some logic that you might as well have a sudden sharp rise in effective marginal rates, as the least bad option.

J Thomas – whatever the merits of the trust fund kid, that doesn't change that Mankiw's work effort is, if his self-report is right, being affected now. If parents are willing to work hard for their kids' sake, but at some point higher tax rates reduce that work effort, then that's what parents do.

Anon – Mankiw's starting point was comparing with no taxes, because that's simple. But he then went on to compare with what he would have paid without the proposed tax increases. To quote Mankiw:
"By contrast, without the tax increases advocated by the Obama administration, the numbers would look quite different. I would face a lower income tax rate, a lower Medicare tax rate, and no deduction phaseout or estate tax. Taking that writing assignment would yield my kids about $2,000. I would have twice the incentive to keep working."

It's a standard illustrative technique, start off with the simplest contrast and then move to the real world case, which sort of emphases that existing taxes, before the proposed tax increases, were quite high. Instead of a 90% effective tax rate, Mankiw would face an 80% one, according to his calculations.

anonymoose October 12, 2010 at 7:35 am

J Thomas, I don't get it. If you're trying to say that we should withhold money from children given that we know their future and we know that giving them a lot of money will make them selfish and lazy, then your "argument" makes a little sense.

I think the real question is why are you so jealous of Mankiw's kids? Did Mommy and Daddy not give you enough? Some people in this world have more money than you and decide to spend it in ways you disagree with–get over it!

josh October 12, 2010 at 7:45 am

In America we have abolished the family. Rejoice peasants!

Tracy W October 12, 2010 at 7:51 am

@Zach:

Ah, I see the source of the confusion. What Mankiw says is that:

"If I invested it in the stock of a company that earned, say, 8 percent a year on its capital … Now let’s put taxes into the calculus …
First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. "

So say he put $1,000 into that corporation that earns 8 percent a year on its capital (pre-tax). If it didn't pay any taxes, it would pay out all that it earned – $80 a year. But with the corporate tax, the corporation still earns $80 a year, but they then pay 35%, or $28 a year, in taxes, so the money returned to Mankiw is now only $65 a year. He's talking about the money that's returned to him, not what his investment earns for the corporation.

anonymoose October 12, 2010 at 7:54 am

@Evan Harper

It's hard to tell what exactly you are getting at when you answer a question with a question. Are you saying that we don't live in a meritocracy?

adam October 12, 2010 at 8:07 am

I immigrated to the US from Europe some time ago, and my US colleagues do not understand why I, a highly paid physician, am currently remodelling our own house.

I explain that in Europe this is pretty common. Physician specialists max expect to collect, per hour, somewhere like four times what a tiler expects to get in the shadow economy: 100 euro/h before taxes vs. 25 euro/h 'black' . Because of the size of the job, most tilers prefer to do such single bathroom jobs 'black'. At a marginal tax rate of 70%, 20% VAT, my insistence on paying 'white' and taxes/insurances the tiler would have to pay on his income to do this job legally, I would have to do three hours of surgical cases to pay for one hour of tiling. Rationally, I preferred to not do the surgical cases, instead spending two hours to do the tiling myself. Twice as slow as a professional tiler, I still came out ahead one hour.

The effects of these high marginal rates were thus

a) the waiting lists for patients needing surgery increased because a highly trained surgeon was tiling instead of doing what he was trained for

b) a tiler did not earn income on a job he was good at

c) lower tax revenues.

I think these effects are morally wrong, which lead me to eventualle emigrate. In the US, having done so many remodels, I keep doing smaller jobs, where the same calculations do not apply.

To pre-empt criticism, let me state clearly that the above explanation is not 'to complain', nor is it what I think is 'right'. I love my work and I love my patients. It just explains the arguments for why I did what I already have done. Some people may do the same in such a situation, others will not: neither are morally right or wrong.

In the US I thought I had arrived in a meritocracy, but the opprobrium over a) Fleischer's August letter in the WSJ b) the Todd Henderson 'affair' c) and now the 'Mankiw affair', as shown for example in the comments here, is starting to worry me.

The criticism seems to come down to either 'these people are selective in their use of numbers', 'they are too rich/do not deserve their income/should not complain' or some mixture of both. I am not convinced either is the case, but even if the criticisms were true, the people criticized still acted on what they wrote and what they believe is correct. As did I.

My brother emigrated to China, and he tells me that there a high income is a reward for hard work. Incentives matter.

J Thomas October 12, 2010 at 8:22 am

@anonymoose:
————
J Thomas, I don't get it. If you're trying to say that we should withhold money from children given that we know their future and we know that giving them a lot of money will make them selfish and lazy, then your "argument" makes a little sense.

I think the real question is why are you so jealous of Mankiw's kids? Did Mommy and Daddy not give you enough? Some people in this world have more money than you and decide to spend it in ways you disagree with–get over it!
———–

Agreed, you don't get it.

I'm saying, why should we incentivize Mankiw to work hard so his kids will be richer, more than we already do?

Mankiw is jealous of the US government because it has more money than he does. So he makes a thousand dollars for complaining about it. But he complains that he could be making even more money for complaining more, but he doesn't bother because it just wouldn't be *enough* money.

The US government has money and decides to spend it in ways you disagree with, and you think it should be saved for Mankiw's children instead.

Get over it!

Tracy W October 12, 2010 at 8:36 am

@Master of Nona: You're making a normative argument, about how things should be. That's fine, but it's not a descriptive argument. When I look around the world I see people leaving money to their children when they die, so I don't think you've convinced everyone that your answer is the right one.

Yancey Ward October 12, 2010 at 8:47 am

I see Bill is still trying to sell that $30 difference without explaining where he got the number.

Bill, here, in it's entirety is the comment I made yesterday that you seemed to be completely incapable of actually reading comprehensively:

From Bill:

1. Mankiw, as I stated earlier and no one since has disputed, is looking at the marginal tax change from letting the tax bracket in the highest income category expire. If you do so, the MARGINAL change is 1,000*.03=$30.

Me:

The top marginal income tax rate as of today is 35% and is to rise back to 39.6% next year. The difference is $46 in tax, so I dispute it. $1000 x 0.35= $350 in tax vs $1000 x 0.396=$396. I don't know where you keep getting this "$30" from, or even this "0.03". Note, my example is only addressing income tax rates, not the additional increase coming 2013 for Medicare tax that arises from the recently passed healthcare law.

So, Bill, will you at least concede that your $30 difference is in fact wrong? And, if not, please explain how you arrive at your figure? Or are you again going to try to claim my math is in error?

Tracy W October 12, 2010 at 8:55 am

J Thomas – the problem with Mankiw working less for society is that those who enjoy reading Mankiw's writing (or who enjoy not reading it, but instead imaging what he wrote and getting upset about what they imagined) lose out from fewer services being provided.

Duracomm October 12, 2010 at 9:13 am

Mankiw is made a simple point, taxes and compensation modify behavior.

The irony is the folks who push for higher taxes on things like cigarettes and soda pop with the specific intent to modify behavior are angry at mankiw for the thought crime of pointing out that taxes modify behavior.

Yancey Ward October 12, 2010 at 9:26 am

Bernard,

He "barely nods at it"? He explicitly shows at the end of the essay the difference between the tax policy of today vs that which is mostly to be in force after the end of the year, and that difference will lower his proclaimed incentive to additional work by a factor of two.

Ed Thompson October 12, 2010 at 9:40 am

Mankiw's uses a no tax comparison and says this is valuable because it shows us how far we are from the optimal situation. I thought there we no free lunches in economics. Mankiw seems to think he should get a host of services provided with funds from taxes for free. I guess that would be really, really optimal. I don't think there would be any money for his children thirty years from now with no military or police force to protect it.

I wonder why he stopped at 30 years? I know that is some reasonable expectation for when his children would recieve the money. But when one is already so removed from reality, why not go 60 years or 1000 years? That would have greatly enhanced his point and increased the ridiculusness of the scenario but just a little.

Lord October 12, 2010 at 9:56 am

More whinny rich people? Enough.

Ryan Vann October 12, 2010 at 10:04 am

Not about to sift through all this junk, but I will say I'm more concerned with the non-productive avoidance activities that higher estate taxes may incentivize than reduced effort due to household effects.

mpowell October 12, 2010 at 10:13 am

I guess we can argue about other people's motives all day and not get anywhere, but my biggest problem with his article is that it contains outright lies designed to advance his desired policy goals.

The argument that the gross corporate tax rates is 35%, or that even if it were, it would cut annual returns to capital by 35% is blatantly and grossly false and Mankiw knows this very well. Sure, in a 2-3 year window, most of the incidence of dropping this tax would pass on earnings to shareholders through dividends. But suddenly you would see spiking stock prices and more capital investment to take advantage of these tremendous returns to capital. Pretty soon the return on equity would be very close to what it was before. And in the counter factual world without this tax, this would already be built into prices and nobody would be receiving any windfall. Mankiw is a respected economist, so I'm sure he's aware of all this. But that didn't prevent him from writing a column in the NYT containing an enormous and obvious lie to try and make a point. So yeah, Mankiw is an @sshole. If you didn't already know this, probably there is some perverse chain of reasoning that will allow you to avoid concluding that now despite the new evidence available.

Jason October 12, 2010 at 10:21 am

Anyone else think the "intransitivity of indifference" comment is a red herring?

If the difference between a 35% top marginal rate and a 39% top marginal rate turns out to have an imperceptible to "just noticeable" (and therefore potentially wrong at some probability) effect on the economy or Mankiw's individual consumption and savings, how can there be any argument either way on those grounds? Given the margins of error in the economic theory and the empirical data, it doesn't seem any top marginal tax rate within 10% (to throw a number out there) can be argued for or against on any grounds besides the budget deficit.

How do we know that we can even "analytically continue" from the theory with taxes to the no-tax theory? One could argue there is a phase transition between the previously existing somewhat more laissez faire economy to the modern welfare state.

So, no, I don't think it is fair to compare to zero tax rates. You expand around the perturbative equilibrium you have.

Andrey October 12, 2010 at 11:11 am

Looks like some commenters could use a year or ten living in soviet communal apartment. You would be surprised how often arguments like "you're better off than me, so don't you dare to complain" or "ah, so you're smarter than me?" were used to (sometimes literally) piss into other people's boots.

PQuincy October 12, 2010 at 12:05 pm

Tyler makes an interesting, and I think revealing comment at the end of his discussion: "filter out the analytically irrelevant social information…"

For an economist in a disciplinary context, that's of course correct: social information is irrelevant in a universe defined by abstract producers and consumers.

However, this is a public blog, and Mankiw published his thoughts in a public newspaper, not an economics journal. As noted, Mankiw also explicitly connected his musings to the pending reversion of tax rates on income over $250,000 to their relatively low 2001 condition.

And for the public, to suggest that "social information" — that is, the fact that we live in a society, that we have emotional, affective and ideological positions that are orthogonal and/or incommensurate with our identities as producers and consumers — is irrelevant is silly. Mankiw is not conducting an economists' thought experiment, he's quite explicitly proposing public policy. Moreover, the policy he proposes, which the CBO estimates would reduce Federal income tax revenue by approximately $70bn a year over the coming decade, has substantial consequences for tax policy, Federal spending, debt issuance, and other actions that really affect real human beings.

So, respectfully, I must reject Tyler's effort to drag Mankiw out of the public sphere where he most emphatically made his comments. This is exactly about social information (including status envy, status anxiety, and status aspirations, which in most worlds outside of economics are recognized as extremely powerful motivators of human behavior).

Tracy W October 12, 2010 at 12:26 pm

Fironel, I note that none of your points deal with anything Mankiw said, let alone identify any errors in his argument. Nor do they deal with anything I've said. Nor indeed do they deal with anything you said in your initial comment on this post.

Zach, if you don't like the 8% assumption use another rate. As for Mankiw's optimal portfolio theory, it's his example, I suspect he knows what level of risk he'll take on his investments better than you or I do. And, well, who is predicting a 2.7% increase in return on investment?

mpowell – I also don't follow you. Why would you suddenly see spiking stock prices and more capital investment in response to a 35% corporate tax rate? I don't recall Mankiw making any such argument, and I've re-read the article and I can't see any such argument. He doesn't refer to people making windfalls at all. So why are you criticsing Mankiw for an argument he didn't even make? And, in particular, why are you stooping to use swear words, for an argument that the guy didn't even make?

Bill October 12, 2010 at 12:57 pm

Yancey, of course I concede it is $46 dollars as you have pointed out the reference to Mankiws own wealth, and not the wealth of the $250 k individual. See, if you do it with facts, it's not hard. And, no I do not concede that the marginal difference in the Bush tax cuts is $350.

Steko October 12, 2010 at 1:24 pm

Kevin Drum as usual nailed this, I'll break it up for the slow class:

"Do you see the card he palmed? Basically, the effect of letting the Bush cuts expire is so tiny that the only way to make it noticeable is to compound it over 30 years"

"… which reduces the eventual payout of his writing assignment from $2,000 to $1,700. (And even that's probably overstated, since it assumes Mankiw pays all his taxes at their full statutory rate, which virtually no one does.)"

"The rest of the reduction down to $1,000 comes solely from the estate tax. But even on the heroic assumption that you should take this year's zero rate as the baseline for comparison, the estate tax has an exemption of several million dollars. Unless Mankiw leaves his kids a helluva lot more than they need for a down payment on a house, they won't pay a dime of estate tax."

That last point is the biggie, and it bears repeating:

"the estate tax has an exemption of several million dollars"

Mankiw is such a bullshitter.

Bill October 12, 2010 at 1:45 pm

Yancey, now I understand you. The difference is $16. I should have ignored your highlighted material as it was confusing, as tome, as I read it as a continuation of the argument of Mankiw'sureal no tax at all base case

Tracy W October 12, 2010 at 2:47 pm

mpowell, I still don't understand your point. Let's say that an equity investment returns 8% per year, pre-tax. So if a 35% corporate tax rate is applied, and the 8% pre-tax return remains the same, then the owner gets a 5.2% return on their investment, post tax.

To quote from Mankiw's column, he says:
"And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains."

I think it's pretty clear from context here that by "that saving no longer earns 8 percent" that he's looking at it from his point of view, as the recipient of the post-tax earnings, not from the corporation's point of view.
Perhaps Mankiw should have chosen a more obvious way of stating this, perhaps "that saving no longer earns 8 percent for me". But "could have worded it better" is a a rather less drastic claim than "is deliberately lying". You haven't shown any evidence that Mankiw is arguing what you are using swear words about.

Mark October 12, 2010 at 3:54 pm

Let's say my girlfriend and I are hungry.
We are comparing a dinner at a cost of $100 and $125 and relative value from each.
Then, she says "Let's compare it to the cost of $0".

Quickly, we realize that $0 cost wins!

So we don't eat. Ever. Again.

This seems analogous to starting a column talking about the Bush tax cuts and comparing to zero taxes. "Zero taxes" are meaningless in this context.

I'm honestly curious and would have preferred a simple calculation of the cost of ending the Bush tax cuts for Manikw, as opposed to a fantasy comparison.

mpowell October 12, 2010 at 6:08 pm

Tracy W – Okay, this point would be obvious to an economist, but I'll lay it out for you. First, capital gains are not subject to the 35% tax. You only pay tax on your net revenue at the end of the year, so if you are reinvesting or otherwise growing your business, you're not paying any taxes on that growth. So let's look at dividends next. The price of a stock is determined by expectations in growth and the dividend yield. If profits go up, stock price goes up. The equity premium determines the required return above bonds. In a world with no corporate tax, maybe stock prices won't be bid up quite enough to exactly cancel the improvement in post tax corporate profits and the equity premium would be a little higher as a result, but I don't see any reason why. And historically, we haven't seen any significant relationship between dividend returns and tax rates. It's similar to the return on long dated bonds. If rates go up the par value on existing bonds drop. I don't expect everyone on the internet to see this problem immediately, but Mankiw should know this and people like Cowen should as well. It's a major problem with the article.

don October 12, 2010 at 6:18 pm

Greg should probably stick with peer-reviewed publications. He is too imaginative to tust himself on off-the-cuff analyses.

Others have caught the obvious gaffes in this latest escapade – the incidence of the corporate tax, and the bequest motive which both Johns (Adams and Keynes) think little of (One said the main purpose of amassing riches is "the parade of riches" and the other remarked that "English industry is a little stupid – too much dominated by third-generation men). We can't design a tax code for everyone based on byzantine preferences of a few. Even then, as MR points out, the estate tax may be rather good at handling such cases if the only consideration were what the tax does to the incentive to amass riches and not what it does to the allocation of resources when left to stupid heirs. And I dispute the notion that the riches generally are created as net gains to society – often they come from rent grabbing. Would we be poorer if Gates had never built the microsoft monopoly, or would we have had as good (or better) from someone else? (Did Gates even have a bequest motive for what he did?)

a October 13, 2010 at 12:14 am

"Some people in this world have more money than you and decide to spend it in ways you disagree with–get over it!"

Why get over it? Why not, get even? Either is a possible response. Getting over it is, in normal circumstances, probably the best way to happiness. But these are not normal circumstances, and there are enough pissed off people that getting even might today be the better way.

"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…"

But Mankiw is *not* someone running a successful small business. And his column was not framed in terms of what a small business owner would do, but what he, Mankiw, would do. Somehow, Mankiw thinks in an environment where the 30-year Treasury rate is at 3.8% (and this is higher than the "risk-free" rate, since a 30-year loan to the US government is hardly risk-free any more), he should be able to find investments at 8%/year. If he succeeds, he's lucky. More likely, if he tries, he will lose big-time like the Harvard Hedge Fund, I mean the Harvard Endowment Fund. Too many economists imagine themselves as potential great traders, simply because they are economists. Well, most economists who try to become traders bite the dust. Deal with it. (Get over it?)

Mankiw was not making a rigorous, well thought-out argument. He was basically whining how he doesn't like tax increases, and using his (*sniff*) children as a tool. Most criticisms I've seen are completely fair.

Simon K October 13, 2010 at 9:51 am

I used to think complaints like Greg's were looking at this wrong – obviously Greg can afford to pay the taxes, so the marginal rate isn't actually the important thing. Who else is going to pay after all? People without $10m dollar estates?

But then I found myself in the part of the income spectrum that actually experiences the peak marginal tax rates, which due to the insanity of the tax system occurs at an income that isn't *that* high and then declines as you get richer. The incentives really are truly perverse – if my wife were to go back to work next year after having a baby, we would get to keep only 27% of her income. Plus, we would lose our Roth IRA allowance, which means the real marginal tax rate is actually more than 100%!

Tracy W October 14, 2010 at 3:54 am

Mpowell, Okay, this point would be obvious to an economist,

Actually, it isn't obvious to me, and I am an economist.

if you are reinvesting or otherwise growing your business, you're not paying any taxes on that growth.

And if you are reinvesting or otherwise growing your business, then you are not paying money out to your shareholders. So this is irrelevant to Mankiw's point, which is about the money he gets as a investor. His starting assumption was a return of 8 percent of his capital per year.

The price of a stock is determined by expectations in growth and the dividend yield. If profits go up, stock price goes up.

Irrelevant from the point of view of Mankiw, in this example. He's already invested his money. And the stock price should be a random walk, sometimes it will go up, sometimes down, based on expectations of higher profits. Mankiw shouldn't be expecting any super-normal returns on his share purchases when he makes his decision about whether to take the money-making work or not, and I see no signs in his article that he expected a super-normal return.

In a world with no corporate tax, maybe stock prices won't be bid up quite enough to exactly cancel the improvement in post tax corporate profits and the equity premium would be a little higher as a result, but I don't see any reason why.

And I don't see why you think this is relevant at all. Mankiw didn't mention rises in stock prices.

This is still an elementary point.

And just one that happens to be irrelevant to Mankiw's article and investment decisions.

I don't expect everyone on the internet to see this problem immediately, but Mankiw should know this and people like Cowen should as well. It's a major problem with the article.

Actually, as far as I can tell, whatever the point you're trying to make is irrelevant to Mankiw's article. Nothing in Mankiw's argument requires stock prices to follow any particular path, be that in response to taxes, or anything else, simply that he expects to get an 8 percent return per year.

Mark: for your information, Mankiw does compare the cost of ending the Bush tax cuts for him at the end of his article, he just starts off with the zero tax example.

Henry October 15, 2010 at 5:15 am

I think Mankiw makes good points – but they're good points against double, triple and further levels of taxation, not so much taxes per se. Someone who earns a dollar and immediately spends it on a cookie is not taxed very much, while someone who earns a dollar, saves it and then leaves the money to his children is taxed far more.

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