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A lot of dreaming and fantasy reasoning going on there. A compounding rate of 8% is a false premise to start from. Ask anyone who has figured the lat 20 years into their retirement calculations. A more rational take would be to assume you can't project rates in the future, but if you do the talk you will get money now, which has value now. A bird in the hand. And if he is concerned about what happens to his money after he dies then the most rational approach is to spend it while alive. History shows the heirs will waste it away.

Not just dreaming and fantasy, there's some actual numerical sleight-of-hand going on here. He's taking advantage of people's misunderstanding of compound interest.

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

BAM - 85% "marginal" tax rate.

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.

Since his whole plan is predicated on giving the income to his kids, he could just gift them the $1,000 as soon as its made and it never gets hit with estate takes. He can now do 12 of these gigs a year ($12,000 a year is the max you can gift without declaring it) and pass it entirely onto his kids.

You have to pay estate tax on gifts too. Otherwise rich people could avoid estate tax by giving their assets to their kids before they died.

I believe that is not the case for amounts below $13k. See http://www.nolo.com/legal-encyclopedia/article-30095.html

A less comprehensible explanation is available from the IRS here: http://www.irs.gov/businesses/small/article/0,,id=108139,00....

Yes, there's an exemption. I'm talking about a marginal dollar, as he is.

If by "he," you mean Mankiw, I agree.

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.

I mean Mankiw.

It's $13k per person (giver and receiver) per year. Additionally, there's a $1 million lifetime exemption (for the giver) which is only cut into once you pass the $13k/year limit.

Fun fact: that $13K limit can actually be a lot bigger. That is the limit from one person to another. Mom gives daughter $13K, mom gives son-in-law $13K, Mom gives kid #1 $13K, dad gives daughter...

Not a good way to rid yourself of millions, obviously.

I like how he compares the hypothetical 8% compounding to the concrete values of the tax cuts.

In fact, many of those higher-tax countries do export their top academics and entrepreneurs to the US.

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.

You're framing the debate in terms of the immediate postwar economy, but I could just as easily invoke the 1990's.

Growth in the 90s wasn't 'unprecedented', and the 90s top 39.6% tax rate wasn't 'significantly more onerous' than today's 35% rate, considering the history of rates:

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States...

"While continuing to point out that the US has a lower tax burden than Denmark, Sweden, Belgium, ... Canada"

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.

It's not false in the aggregate; an equally fair argument would be to find locales in the US with miniscule property taxes and no state personal or corporate income tax (somewhere in Wyoming, presumably).

I like the implied reasoning saying that "Other governments are willing to take a bigger slice of the fruits of your labor, so you have no grounds to complain." Except I don't, actually.

That's not the logic I'm employing, though I see why you think it is. I'd rather point out that those 26 other countries do not appear to suffer a deficit of academics like Mankiw, despite a much stronger incentive for them not to take similar speaking engagements.

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.

Most of those other countries have pretty dismal mathematical output. Not only that, but the country with the best mathematical output of the ones you listed is the UK, which I think has the most "American" tax code. Whenever anyone produces a good mathematician, that mathematician seems to always come to the US. There's a reason Terrence Tao didn't stay in Australia. I'm not actually saying that this is because of our lower tax rate, I'm just pointing out what you likely already knew but disregarded to make a point.

Mankiw isn't a mathematician; he's an economist. Ranked by impact factor, Europe's universities are indeed outclassed by those of the US (attempt to control that by population and by the radically different systems those institutions operate under). I don't think you can really defend the claim that Europe's academic output is "dismal" compared to, like, the Earth, though.

No, but it is dismal compared to America's, which is what I said. And you said "academics like Mankiw", not "economists like Mankiw." Also, stipulating "by impact factor" seems like a sneaky way of suggesting that that's not a legitimate way to rank. That's fine; it's still true when you rank by "quality of output factor."

I chose impact factor because it's easy to look up. I suspect any other reasonable metric will produce similar results. I object only to the emotional word "dismal" here. Europe simply isn't a wasteland of academic economic thought.

I'm not a tax expert but how are you sure that the tax burden for this income bracket is not _more_ in the United States? Sweden may have ~60% income tax but how much of the back-end tax finagling occurs in Sweden compared to the United States?

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).

Without doing the research to prove it, I'm going to go out on a limb and suggest that the tax burden on the top 1% of earners in the 26 countries I cited with higher average tax burdens is more onerous than the tax burden on the top 1% of earners in the US, because most (all?) of them have more steeply progressive tax systems.

The "complexity" of the US tax system is orthogonal to the issue we're discussing.

    Without doing the research to prove it

http://www.photius.com/rankings/tax_burden_country_ranks_200...

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.

Top earners who live in NYC (not NY, mind you, but NYC, which has a harsh city tax) are marginally (#21 instead of #26) worse off in this analysis, but the entire rest of the country is significantly (#35 instead of #26) better off. Despite the fact that you've provided evidence that enhances my argument and not yours, I'm willing to stipulate that it's a wash.

AFAIK, Slovakia has flat 19% income tax (including income from dividends and capital gain), so I wouldn't be so sure about US having the least onerous tax systems of all named countries.

I provided a ranked list of average tax burden, not income taxes. The tax burden includes personal income tax, corporate taxes, social insurance, property tax, and goods and services taxes.

This seems like the appropriate comparison to draw, since it's the metric Mankiw himself evokes.

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.

You're right, I was being cute.

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.

You are correct - retirees together with the poor (90% of whom don't work full time).

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:

http://www.sciencemag.org/cgi/content/summary/329/5997/1287

Spending on SSDI and all forms of welfare is dwarfed by retiree payments.

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.

It's not just 'Mankiw Happiness'; it's 'Mankiw Production'. I might be indifferent to his happiness, but I want him producing.

Can we split the difference and call it "Mankiw Incentive"? I say "Mankiw Happiness" because it sounds funny to me, but we're not actually talking about Mankiw Production.