Greg Mankiw: I Can Afford Higher Taxes. But They’ll Make Me Work Less.
nytimes.com
nytimes.com
"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.
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
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.
A less comprehensible explanation is available from the IRS here: http://www.irs.gov/businesses/small/article/0,,id=108139,00....
But I think you probably mean mikeryan. I don't think he was talking about a marginal dollar. His point was that the first $12k ($13k in 2010) gifted are taxed differently than dollars beyond that threshold.
I suppose the real question is the relative importance of the behavior at the margin versus the behavior for the first dollar. For the ultra-rich, $13k is obviously irrelevant, but for someone near the $250k annual income threshold like Mankiw, I don't think it is. The present value of $12k per year given every year for 30 years is substantially larger than the same amount invested and then hit by estate tax at year 30.
Not a good way to rid yourself of millions, obviously.
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.
http://en.wikipedia.org/wiki/Income_tax_in_the_United_States...
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.
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.
It is less than honest to suggest that the tax increases we are discussing will be used for things like fire protection. The vast majority of government spending these days is not providing public goods. Police, fire, defense, the CDC and other public goods make up a relatively small portion of the budget.
For the most part, the extra money Mankiw pays will simply be redistributed to people less productive than him (federal bureaucrats, people capable of working but who don't wish to, corporations less productive than competitors/alternatives). If you wish to argue that those are useful purposes, be my guest.
However, the dominant component of "people capable of working but who don't wish to" is --- by my casual analysis (please correct me) --- retirees on social security. It's also dubious to suggest that if we drastically cut back on the social safety net that the entire entrepreneurial class would necessarily fare better; many of us[1] would have to redirect our efforts and risk tolerances to fund our parents retirement.
We probably agree more than we disagree on the subject of civil servant pensions.
I am willing to accept that there is no tax/spend scheme that is ever going to make me entirely comfortable (a single trip to the DMV illustrates this nicely) without rejecting entirely the idea that we should trade off some personal incentives for our collective well being.
[1] Not me, though.
It would not be necessary for young people to fund their parent's retirement, their parents would not necessarily need to retire. A large number of older people are capable of working, and the latest projections suggest that this trend will only increase in the future:
We likely agree on ratcheting up the retirement age.
This argument plays out like a chess endgame. Can we cut to the chase and acknowledge the tradeoff that's being made? At some level, we as a society are trading units of Mankiw happiness for units of peace of mind about retirement.
We certainly do it inefficiently, and, in particular, we drag alone a whole class of free riders who create a drag on the operation of our local and state governments. But even if we optimized all that away, the same fundamental response would apply to Mankiw's argument.
I am not simply pointing out that "taxes buy stuff" --- though that is also a valid point to make. I am saying that Mankiw ignores an offsetting form of incentive to work and (particularly) take risks: the well-being of our close relatives.
Again, it may very well be more than the claimed 90% tax rate. I also realize the professor has a vested interest (for several reasons) in knocking the tax cut expiration. But the United States tax system is complex beyond belief and I think any comparison with other countries is never simple.
Edit: Or higher than the 'real' tax rate if the professor is pushing the numbers in his favor (likely).
The "complexity" of the US tax system is orthogonal to the issue we're discussing.
Without doing the research to prove it
You'll notice that US/NYC is 21 and US/IL (where I'm at) is 35. You should also notice that many of the >35 burdens have a large VAT/Sales Tax which has less impact on the top 1% of earners.
Again, I'm not an expert in these matters. And, in any giving country the professor may be paying more in taxes. However, to systematically dismiss the tax burden of the United States because we have a low income tax isn't taking the full picture into account.
This seems like the appropriate comparison to draw, since it's the metric Mankiw himself evokes.
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.
Trying to make it sound like $1000 is the only incentive in play here seems like a mild distortion at the very least.
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.
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.
For extra credit, explain why all of the above doesn't make sense.
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.
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.
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.
I do not see the downside.
- 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.)
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.
If you mean this [1], I have read the Krugman article on the stimulus' size. I'm sure Mr. Krugman's analyses are correct in the short term, although I suspect there's some question of how much you can increase GDP through government spending before other effects start working against you (like uncertainty about future taxes, decreasing ability of the country to borrow more money, etc.).
Regardless, like an ice bath is to a fever, this may treat one symptom, or even temporarily make things better, but it may also make things worse in the long run. There's nothing even remotely like a consensus that increased government spending and extra money for the poor is the correct solution to the current economic climate.
[1] http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithme...
Presently, there is zero indication of any decreasing ability of the US government to borrow money.
The reason there isn't any consensus on increased stimulus spending at present is mainly because of Republican lies, and the economists like Mankiw (a Bush advisor) who spin in support of them.
As you may gather from this post, I'm somewhat pissed off at the situation, and probably vented at you because of my anger. Sorry for the overreaction.
I agree, to spend is to tax. But to spend even more is to tax even more. I'm sure additional stimulus dollars would be money far better spent than the money we have spent burning Iraq and Afghanistan to the ground, but the fact remains that additional stimulus spending must be additionally paid back some day. The chief question in my mind is whether the return on those additional dollars would be worth the price.
I think you may be overestimating the extent to which outright Republican lies, numerous though they are, are affecting consensus on this issue among economists. For example, there are many non-Keynesians out there who disagree with the assertion that high government spending can counteract a recession.
I must confess, though, I don't have my ear to the ground as well as I would like on this topic. Kind of makes you wish that there was a Cliff's notes for recent updates in the outlook of experts and academics on various important topics. My understanding is that Krugman's outlook typically differs somewhat from most economists' beliefs (as surely it would with Mankiw's arguments in the linked article), but perhaps that is not the case re: additional stimulus spending?
Also, see Krugman's current op-ed about the true extent of the stimulus: http://www.nytimes.com/2010/10/11/opinion/11krugman.html
Hmm, you seem to be claiming a either conclusive proof that Keynesianism is correct or disproof of Monetarism, new classical macroeconomics, and the Austrian school, etc. Either of these would be news to me. Am I reading you wrong?
http://krugman.blogs.nytimes.com/2010/09/20/structural-imped...
People aren't buying things (presumably because they can't afford them), so businesses aren't hiring. Look at the graph. Businesses aren't concerned about "Interest Rates & Finance", which means they can get the money they need. They just don't have anyone to sell things to.
I don't think my accusation that you weren't paying attention has any merit since this is the article I was thinking of at the time, and it's only three weeks old. I apologize. I think there were other things said along these lines, though.
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.
Indeed. His tenure in the Bush administration was mediocre. Then again, he could be a great public speaker.
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.
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?
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.
"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.
$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.
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"?
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.
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)
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.
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 $7000.
Is he talking about investing in a company that's growing 8% or is it his investment in the company that grows at 8%?
The corporate tax rate of 35% is another example. Does revenue from Google UK count towards the total revenue for Google? If so, then since Google's UK headquarters are in Ireland, the corporate tax on that revenue is more like 12.5%, unless it gets taxed again by the US.
Personally, I work because I enjoy it and am passionate about what I do. If I come out ahead and have money to survive and buy a few modest luxuries, then I'm happy.
If you don't like what you do and work is a pain, but you're addicted to the money stream, something is very wrong.
Similarly, having a society where people don't have the opportunity to better themselves is also wrong - and that's where government can and should attempt to improve the system.
You may be a Harvard economist, I'm glad you're not my accountant! You've gone out of your way to maximize the tax penalties you'll incur in your goal of paying for your children's education. Perhaps you should take that 1000$ 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?