Sunday, October 10, 2010

Shut-up, NYT: Mankiw Will Work Less if Taxed More (see also: Laffer curve)

The bright and extremely personable professor of economics at Harvard University, Greg Mankiw, writes in the NYT about how higher taxes mean he'll end up working less.
HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?
I'd like to personally thank Greg for this eloquent explanation of the Laffer curve. I'm sure it's included in once of his excellent textbooks, although this article was certainly more memorable. My issue is with his last thought, though:
Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.
Yes, maybe. But Greg is making the assumption that if he doesn't provide his services, someone else wouldn't step-in to fill in the gaps. I'd see this argument being valid when we are close to full employment levels, but the unemployment rate amongst individuals, even if lower than the less educated, is still elevated.
Image source: Calculated Risk
I'm sure that there is plenty of unemployed or underemployed economists who would be happy to take that work Greg doesn't really want, many of which are probably adequately qualified, even if they lack his reputation.  To Greg's possible substitutes that fall under a lesser marginal tax-rate, this same work would yield more savings, meaning they'd be more willing to take on that extra work even if their supply curves are identical. Those who are less financially comfortable and are more willing to sell their labor may be willing to provide the same services for the lesser compensation they might be offered as a result of lacking Greg's name-recognition. So my final comment to Greg is that it may be worth considering that maybe this is not so much about "how much the government should redistribute income" but about how much government should redistribute the opportunity to work. And right now, Greg, there is plenty of us that would be perfectly willing to provide our services for both income, and the opportunity to create a name for ourselves so that one day we too can turn down jobs because, after taxes, they don't pay that much.

As a final nitpick, that 90% estimate is kind-of a worst-case scenario. If Greg's concern is really how much taxes are going to reduce what he finally leaves his children and grandchildren, he should look into estate-planning and all of the opportunities there is to distribute accumulated wealth to heirs over time to reduce the tax-impact, whether it is tax-exempt gift allowances, 529 Plans, or other of the products that are available for these purposes. If you are interested in any of those services, Greg, please feel free to leave a comment and I will make sure to put you in touch with some financial professionals that are both highly-qualified and very much willing to work.

2 comments:

  1. The amount of interest he earns is not just predicated on the amount he forgoes in taxes plus whatever return rate he gets, but also on the very things taxes pay for - a stable society based on laws, and a "fair" market environment needed to earn said interest!

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  2. I think your penultimate paragraph is right. That's a subtle, relevant, and probably forgotten point about lower marginal tax rates for the underemployed economists.

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    On the subject of the Laffer curve, there are at least 2 questions I want answered before accepting that Laffer's entirely reasonable axiom is relevant to actual policy:

    1) Where is the arg max? In actual implementation the designers of a tax can use as many gradations as they want to (or even a continuous formula) so the answer isn't a point but rather a curve. Even point estimates of the optimal rate on top-percentile incomes would be nice to have, though.

    2) How much higher is the max than the status quo? http://tmblr.co/ZdCxIyH7R2Iu

    I also think one should be careful to distinguish between revenue-collection goals of the government and economic-growth goals. Whether taxes reduce growth is related but not necessarily the same to the issue of maximising economic growth (and to whom it goes).

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Do the right thing.