The people are upset at Greg Mankiw

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.


Comments for this post are closed