Wednesday, October 20, 2010


I like Greg Mankiw because, among conservatives, he's reasonable. The problem, however, with providing reasoning for opinions is that one can now argue against them.

From his recent NYT Op-Ed:

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

This is all correct, but his premise illustrates the first problem. The reason why we're not concerned about the wealthy (as he puts it, "almost completely sated") getting a big tax cut is because they can afford to save it. Saving is good, but it's not an economic stimulus. Give the same size of tax cut to someone who is in far greater need, and the person will spend it soon, and in aggregate, generate jobs.

After summarizing all the taxes that would impact this previous situation, his conclusion:
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?

This is all also correct. But again: is this a problem? You are "almost completely sated." If you turn down the offer to write an article, then someone else gets that same offer. If all the people who are almost completely sated (as well as the completely sated ones) find the offer equally unimpressive, the person accepting the offer to write the article will almost certainly be in a position to spend it sooner and stimulate the economy, as well as advance his or her own career.
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.

This too is correct, but has an implied fear tactic. The subtext is, "tax your doctor too much and you won't get any health care!" There are, however, plenty of capable people who want to do these jobs, who are just waiting for others to step out of the way.

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