Linda Beale: Boost Greg Mankiw's Marginal Tax Rate. Andrew Gelman: I'm Not Impressed with an Argument That Doesn't Work on Its Example
Why oh why can't we have a better press corps?
There were many things wrong with Greg Mankiw's "Going Galt" column in the New York Times. They biggest was that Greg blames high future tax rates on his income on Obama, rather than piercing the veil--that is, noting that to spend is to tax--and blaming the true architects of higher future taxes: Greg Mankiw himself and the others in the Bush administration who unbalanced America's public finances in the 2000s with Medicare Part D and their wars of choice.
Those of us who worked very hard in the 1990s for eight long years to try to bring America's fiscal policy back toward long term balance did not like Greg Mankiw and company's casual destruction of our extremely valuable work. And we like his current evasion of responsibility for his role in our admittedly dismal fiscal future even less.
Linda Beale, however, thinks that it is socially optimal to raise Mankiw's marginal tax rate. If he works less, more young economists have an opportunity to build their own sklls and their own reputations so they can add to the public debate.
ataxingmatter: Greg Mankiw's anti-tax arguments: [H]aving 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... he would turn down more... were an incremental increase in his tax rates.... [D]oes that mean that the economy suffers...? 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.... 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.
Mankiw's marginal tax rate (which declined from 93% to 80% in two years) and the difficulty of microeconomic reasoning: First, the good news! Obama's tax rates are much lower than Mankiw had anticipated! According to the above quote, his marginal tax rate is currently 80% but threatens to rise to 90%. But in October 2008, Mankiw calculated that Obama's would tax his marginal dollar at 93%.... According to Mankiw's calculations, he is currently keeping almost three times the proportion of his income that he was expecting to keep under the Obama administration....
Now, the bad news. I don't think Mankiw has fully thought this through. He writes as if he's writing newspaper articles for the money.... I think he's writing the articles because he has views that he thinks are important and he wants to share them with the world. Like blogging, but with more readers. As you all know, we blog for free. And, for people like Mankiw (or even me), when we write newspaper articles it's pretty much for free too.... [T]he marginal tax rate doesn't have anything to do with it....
The last time this came up, a couple of years ago, Mankiw wrote the following in response to Obama's threatened 93% marginal tax rate:
The bottom line: If you are one of those people out there trying to induce me [Mankiw] to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.
And here's what I wrote at the time:
To start with, it does sound like Mankiw's kids are already well provided for, and, although I'm sure they'd disagree with me on this, it's not clear that they would benefit from having more money in the bank when their parents are gone. So, from that point of view, the question is why Mankiw isn't already spending more time playing with his kids?
I can't speak for him, but for me, I have to say that it can be fun to work (or even to write blog entries). But, more than that, I feel a sense of obligation to get things done...
[H]is division of waking hours into "working" or "playing with kids" is, I would guess, not very sensitive to the marginal tax rate....
The irony is that Mankiw (like so many people, particularly economists!) is conditioned to be hard-headed and think that it's all about the benjamins, when, really, he's writing newspaper articles for the completely sane reason that he wants to make the world a better place, and he'd like to do this by presenting cogent arguments that can help convince people that his views are correct. I assume that Mankiw sincerely believes that higher taxes on the rich are a bad thing and will ultimately make everyone less well-off (just as Krugman, say, believes the opposite). But he feels uncomfortable characterizing his actions as idealistic and, as a result, ends up placing his work and child-care decisions into a nearly nonsensical framework of dollars and cents.
Update on Mankiw's work incentives - : The discussion of Mankiw's column seems to have caused him to rethink one of his ideas. Two years ago, he framed his decision as follows:
On a regular basis, I am offered opportunities to make some extra money. It could be giving a talk, writing an article, editing a journal, and so on. . . . The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. The choice was clear: make money or play with the kids. At the time, I suggested that perhaps Mankiw is working not for the money but for the fun and also out of some sense of moral obligation (for example, to do his part to stop a proposed government policy that he opposes).
For whatever reason, Mankiw has added some of these motivations into his calculus and now writes:
I [Mankiw] face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits. . . . When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits. Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work."
I think he's most of the way there. But he still needs to recognize that he does some things for motivations that are neither familial (saving money for his kids), pecuniary, or for fun. Again, I think his formal framework is too narrow and I would find it refreshing if he were to state that he does some things (such as column-writing) because he thinks they will benefit the public good. I'm not saying he needs to be taxed at 93% on these efforts, though; he could perhaps set up a special cookie jar for his extra income and spend it in a productive way on his research so it won't get swallowed up by inheritance taxes in 30 years. He could, for example, set up a nonprofit foundation for economic analysis, or endow a fellowship at the American Enterprise Institute, or something like that. This could have the effect of furthering his advocacy and policy goals and give him the sense that his extra money is going somewhere useful.
P.S. Cowen argues that details-oriented commenters like me are missing the point: the issue is not Mankiw's particular circumstances but rather the larger issues of the efficiency and morality of high tax rates. I take Cowen's point, but, as a statistician, I'm not impressed with an argument when it doesn't work on the example it's been applied to.