
Greg Mankiw: I Can Afford Higher Taxes. But They’ll Make Me Work Less. - cwan
http://www.nytimes.com/2010/10/10/business/economy/10view.html
======
tptacek
Long story short: Mankiw could take a $1k speaking engagement and, after 30
years of compounding 8% (please pass on stock tips, Mankiw) growth, pass on
$10,000 to his children. But because of a battery of taxes, it will only come
to $1700. And because he will likely be dead after 30 years, the estate tax
will chew up another $700. Therefore, he won't do the speaking engagement.

"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.

~~~
toddh
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.

~~~
CoreDumpling
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.

~~~
mikeryan
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.

~~~
pg
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.

~~~
pingswept
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....](http://www.irs.gov/businesses/small/article/0,,id=108139,00.html)

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

~~~
pingswept
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.

~~~
pg
I mean Mankiw.

------
mikeryan
So if you are

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.

~~~
loumf
Obama cannot do anything about tax rates -- the 2001 congress passed a
temporary tax cut which Bush signed. Whatever you think about the tax-rates
going up was decided 10 years ago to dodge CBO projections of cost by Bush and
that congress.

------
kschrader
Does anyone else find the entire premise flawed? If all he wanted to do was
maximize the amount of income he's going to pass on to his children then he
would be an investment banker, not a Harvard professor/author. Any bank would
take him in an instant.

Trying to make it sound like $1000 is the only incentive in play here seems
like a mild distortion at the very least.

~~~
jseliger
_If all he wanted to do was maximize the amount of income he's going to pass
on to his children then he would be an investment banker, not a Harvard
professor/author._

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...](http://www.amosweb.com/cgi-
bin/awb_nav.pl?s=gls&c=dsp&k=backward-bending+labor+supply+curve) .

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.

------
pandafood
Arguing against higher taxes because they discourage people from working is
like arguing against jailing people for drug offenses because it overcrowds
jails. It could be right (though in the case of raising taxes, history doesn't
seem to bear this out), but it's not the real reason that we shouldn't want to
pay higher taxes. The reason is that they do bad stuff with our money. There's
a sense in which it can be said that all of your tax money goes towards paying
down interest on the national debt, but if you take a look at what that debt
is for, you'll likely be unhappy. If we (the people who don't want to pay
higher taxes) pretend that it's for some reason other than it is, we put
ourselves at risk of being told that our made up reason is stupid.

~~~
mquander
People who want higher taxes don't agree that they do bad stuff, or they
wouldn't want higher taxes.

~~~
pandafood
There are those people, and there are the people that don't know about the bad
stuff. Actually, to be fair, there are also the people who know about the bad
stuff but dont think lowering tax revenue is a good way to get them to stop
doing the bad stuff. I think the first group of people might have a strange
set of values (unless you mean that they don't think the net effect of what
the government does with taxes is bad, in which case I agree with them), but
it's still worth arguing about to convince the second and third groups.

------
rikthevik
My girlfriend works 4 days at as a pharmacist. Her income for working a fifth
day puts her into a high tax bracket in British Columbia and results in her
making dramatically less money for that day. So she uses that time to develop
herself personally and work on side projects.

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.

~~~
jseliger
This is some of what I describe here:
<http://news.ycombinator.com/item?id=1777371> . Thanks for another example of
it.

------
Teckla
If the Bush tax cuts for the wealthy are extended, it means the U.S. must
continue to borrow greater sums of money than it otherwise would have to, in
order to pay for those extended tax cuts.

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.

------
lkrubner
From what I've seen, some people have an in-born desire to work hard, and some
don't. Taxes do not change this. The emphasis on taxes strikes me as a bit of
posturing, and a ridiculous one at that. I've never had a single acquaintance
say to me, "Yes, I've worked 70 hours a week these last few years, but they
are raising nominal rates on my top brackets this year, so I will only work 50
hours a week from now on." Humans just don't work like that.

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.

~~~
WalterBright
I do know people who figured out their marginal hourly rate after taxes, and
decided to cut back their hours worked to stay under that.

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.

~~~
lkrubner
Well, like I said, "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."

------
subwindow
He's ignoring the fact that having Mankiw work less may be a good thing. If
Mankiw makes that $1000 for an article, he'll sock it away and it won't get
spent for 10+ years. If a starving writer instead takes the job, he'll spend
it immediately.

I do not see the downside.

~~~
jamesaguilar
A few problems with your analysis.

\- 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.)

~~~
hdctambien
Isn't the problem right now that people aren't spending money, though?

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.

~~~
jamesaguilar
I know that people not having money to spend is an ongoing symptom of the
problem with our economy. If it were true giving poor people $N thousand would
fix our problems, I would support that move. But I haven't seen a credible
argument to this effect besides gut reactions from people writing comments
like yours. Do you have any links to articles from experts making similar
claims? Any evidence of consensus on this topic among experts?

~~~
MaysonL
Go read Paul Krugman on why the stimulus was way too small, and stop trolling.

~~~
jamesaguilar
That was unnecessarily rude. What I've written is far from trolling, and it's
irresponsible and uncharitable of you to call it that.

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...](http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-
wonkish-but-important/)

~~~
MaysonL
1) Future taxes were made inevitable by a) the unfunded Bush tax cuts b) the
unfunded Bush Medicare part D prescription drug benefits c) the unfunded Bush
war in Iraq. _To spend is to tax._ If you (as a government) spend, you are
going to have to tax, either now or in the future, either directly or by
devaluation (inflation) of the currency.

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.

~~~
jamesaguilar
It's OK. I sometimes get riled up about politics too.

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?

~~~
MaysonL
And almost all of those non-Keynesians [perhaps a better term would be anti-
Keynesians] are wrong.

Also, see Krugman's current op-ed about the true extent of the stimulus:
<http://www.nytimes.com/2010/10/11/opinion/11krugman.html>

~~~
jamesaguilar
> And almost all of those non-Keynesians [perhaps a better term would be anti-
> Keynesians] are wrong.

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?

------
Anechoic
What I don't like about Mankiw's logic is that he's only looking at part of
the picture. He talks about being ble to save $1,000 without taxes vs $523
with taxes. Fine, let's look at the $1,000 - now how much of that $1,000 will
he have to spend to fix damage to his car's suspension system caused by
crumbling roads? How much will he have to pay for private schools because the
public schools suck? How much will he have to pay for home security monitoring
because the police and fire fighting services have had cutbacks? How much will
he have to pay to repair the water damaged caused when a nearby 50 year-old
water main broke and flooded his house?

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.

~~~
jonallanharper
You seem to think that $10 out of $10 in taxes goes directly towards roads,
schools, or whatever. In reality, about $2 out of the $10 is actually spent
for the those purposes.

$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.

~~~
tptacek
Six dollars out of every ten dollars spent by local, state, and federal
governments are dead weight loss? Cite a credible source, please.

------
aarghh
The fundamental fallacy here is that people respond purely to monetary
incentives for work. This may be true for Mr. Mankiw, but it is not a
universal truth.

~~~
philh
I don't think anyone's making that assumption. The argument holds if people
respond _at all_ to monetary incentives for work.

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.

------
loumf
If this article is indicative of the content of his speeches (purposely
misunderstanding tax policy and misleading with math), then I'm relieved that
he intends not to speak publicly.

------
danielsoneg
Ok, a couple points here:

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.

------
aniket_ray
Do Americans have to pay income tax whenever value of stock appreciates (even
if he does not sell in the market)? I doubt it. Since valuation of stock would
vary.

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.

~~~
CoreDumpling
Not when stock appreciates, but you get taxed each year on dividends and
interest paid out by investments. That is how I end up paying taxes on my
investments every year, which still have unrealized losses of 35% or so.

------
TYPE_FASTER
Couldn't he use a LLC to avoid the estate tax? His whole argument seems overly
simplified to point of being incorrect to me.

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.

~~~
d2viant
As far as I'm aware, the revenue generated by a foreign subsidiary is not
taxed again by the US until it enters the US economy. So long as it stays
overseas we don't touch it. It's interesting to hear people note the record
amounts of cash that US companies have on hand right now, but much of that is
in foreign accounts and can't be brought into the US without paying a huge tax
on it.

------
MaysonL
For an interesting comment, see Brad DeLong's "Greg Mankiw Quits the New York
Times?": [http://delong.typepad.com/sdj/2010/10/greg-mankiw-quits-
the-...](http://delong.typepad.com/sdj/2010/10/greg-mankiw-quits-the-new-york-
times.html)

------
edderly
If you treat this as a statement of fact, the economic consequence of this is
clearly a matter of interpretation. The fact that Mr Mankiw might not be
providing labor may mean that others will simply do the task and pay money on
their earnings instead.

------
mmaro
Out of curiosity, does anyone know what tax rates looked like in the 1800s?
Zweig's 'The World of Yesterday' says it was in the single-digits in Vienna,
but I'd like to have better numbers for more places.

~~~
tptacek
I don't know, but it's worth pointing out that the US in 1890 was so different
from the US of today as to make that an apples/oranges comparison. To draw
some somewhat relevant comparisons: in the 1800s your children might very well
be working in a mill to support the family, and there was no such thing as a
weekend.

------
daltonlp
Well if it isn't Mister Galt :) Nice to hear from you again!

<http://en.wikipedia.org/wiki/John_Galt>

------
zdw
The unstated fundamental assertion of this is that people only work because of
money, and to amass huge sums of it to pass on to their heirs.

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.

------
sshumaker
Dear Mr Mankiw,

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?

