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Home Publications Blogs Beat the Press Greg Mankiw Says We Have to Tax the Middle Class More

Greg Mankiw Says We Have to Tax the Middle Class More

Saturday, 29 December 2012 18:50

That is the explicit argument in his NYT column today. What is more interesting than what he says is what he doesn't say. There is no mention whatsoever of the possibility of taxing Wall Street, an idea that is now being pushed even by the International Monetary Fund. The U.K. raises between 0.2-0.3 percent of GDP on tax that only hits stock trade, leaving options, futures, and other derivative instruments unaffected. This would be roughly $500 billion over the course of a decade in the United States.

Japan had a tax that raised 1.0 percent of its GDP in the late 80s. That would be roughly $2 trillion over the course of a decade. Robert Pollin and I outlined a structure of taxes that could raise a comparable amount here. Anyhow, the middle class might be in Mankiw's sights when it comes to taxes, Wall Street obviously is not.

The biggest item on the other side of the equation is health care. Our costs are hugely out of line with the rest of the world. We pay on average more than twice as much per person for our health care as people in other wealthy countries with little to show for it in terms of outcomes. If our per person costs were comparable to those in other countries we would be looking at long-term budget surpluses, not deficit.

We could look to fix our health care system or failing that allow people to take advantage of the more efficient systems in other countries by promoting trade in health care services. But this is apparently also not on Mankiw's agenda. These measures would likely be bad news for the drug companies, medical equipment industry, and highly paid medical specialists.

In short, if we assume a world where we can't take any measures that would hurt the wealthy, then we will probably have to raise taxes on the middle class. However the rest of us may not want to accept Mankiw's assumption here.


Comments (18)Add Comment
written by Danny, December 29, 2012 7:31
You need to stimulate the economy. Bypass the banking system when conducting monetary policy. Modify the fed so it conducts policy directly with the public so stimulus can actually enter the economy and without depending on the lending policies of banks.

Also Missing
written by Scot Johnson, December 29, 2012 9:07
Another thing that struck me about Mankiw's article is that there is no mention of rising income inequality. In fact, at one point he argues that the wealthy are paying plenty enough. What he fails to mention is that their incomes have grown way out of proportion to their increasing productivity. That strikes many people (myself included) as some kind of market failure that begs correction.
Also missing continued
written by Jennifer, December 29, 2012 10:53
As usual "entitlements" are lumped together, even though they are funded quite differently and face different issues. Left completely unsaid is that Medicare costs have come in UNDER budget for the last three years, and while the recession played a part there seems to be growing consensus that there are other issues at play. Combined with changes that will come with the ACA it is not unreasonable to think that Medicare costs are manageable and not spiraling out of control as envisioned several years ago. Of course the narrative of unsustainable "entitlements" must be maintained, otherwise there is no reason to cut them.
written by urban legend, December 29, 2012 11:27
The President could continue to bury Republicans by taking any reductions in Social Security and Medicare benefits off the table completely, thereby forcing them to keep agitating for reductions. We know those reductions are deeply unpopular. So why take them off the hook by compromising with them?
written by malcolm, December 30, 2012 3:11
Mankiw may have an honesty problem but does anyone truly believe that we can afford all of the Bush tax cuts? Perhaps we should consider eliminating them all when the economy has recovered...That would put us back to the principles that Gore ran on in the 2000 election
written by Chris, December 30, 2012 5:48
Caroline Baum is a rarity--an economics commentator who actually understands economics and writes about it with clarity and passion. Read her and learn! Read her and enjoy!"
—Gregory Mankiw
Professor of Economics, Harvard University
That's about all we need to know about Mankiw I think. (Baum is a journalist writing for Bloomberg who did her graduate work in cinema criticism).
written by Chris, December 30, 2012 5:58
Here is more from the woman Mankiw thinks "actually understands economics." In contrast to Krugman, I suppose.

Bush Tax Cuts
written by Bart, December 30, 2012 6:28

Good idea, Malcolm. Why not ease them out over the decade, based on hitting specific benchmarks such as unemployment, GDP growth, etc.?
Response to urban legend
written by Jennifer, December 30, 2012 8:04
Because he wants to cut them too, there is no other reason.
Taxes by the fiat issuer
written by Benedict@Large, December 30, 2012 8:22
In a fiat currency, taxes by the fiat issuer do not fund the issuer's operations. We do not use federal taxes to PAY for anything; simply to regulate the value of the currency. Mankiw's suggestion that we need to raise middle class taxes to avoid some sort of current or future solvency issue is utter nonsense, and he should be fired for incompetence.
Transaction taxes
written by AndrewDover, December 30, 2012 10:09
I could see matching the new French stock transaction tax of 0.2%, but not up to the level of your proposed 0.5% stock transaction tax.

We need to advertise what we're looking for: taxes that REDUCE WASTE. Taxing Wall St. is one way to do this
written by Rachel, December 30, 2012 10:12

Of course phasing out the tax deduction on mortgages would help reduce waste too, namely, the money that the wealthy spend on bigger houses than they would buy, if renters weren't subsidizing the sprawl.

And doing something about the waste in health care that is promoted by the tax exclusion, that would bring in some money and promote fairness too. If the people in the top 2% weren't subsidized by the less-well-off, they might be more prudent about their health insurance choices. After all, the big problem with American health care is not that we get too much. The problem is, we PAY too much. Perhaps $800 billion a year too much.

Taxes on Wall Street would also be a valuable tool in reducing waste. Here too, as in health care and real estate, profits have been greatly inflated by government interventions ... not to mention lack of prosecutions!
(That's one reason Medicare's administrative costs are so low. Over the decades, they haven't worried much about fraud.) Under these very un-free-market circumstances, the very modest taxes proposed by Dean and colleagues could only help.
written by David, December 30, 2012 12:04
Andrew, where do you see 0.5%? I'm missing it somehow.
written by crazyeconprof, December 30, 2012 1:51
Mankiw's article seemed entirely reasonable. There IS entirely too much wishful thinking (on both sides) and a tiny bit of realism is what is needed.

Instead of reasonableness, we get Prez O'blamer doing what he does best (being a narcissitic demogogue). So, its over the cliff we go kiddies.
More than an "honesty problem"
written by Matt, December 30, 2012 11:40
@malcolm: Mankiw has a bit more than just an "honesty problem" with regards to the Bush tax cuts being affordable - he was one of the ARCHITECTS of the cuts, and a strong advocate for them.

Rejecting them in their entirety might even be OK, given a new understanding of the economic situation - but insisting they be maintained only for the 1% while also refusing to admit policy error is truly galling.
For David
written by AndrewDover, December 31, 2012 7:17
I pulled the 0.5% from Dean's paper via his link.

"If there were no reductions in trading from the 2008 level, then a tax of 0.5 percent on each stock transaction would raise almost $220 billion a year."

written by Josh, December 31, 2012 12:12
Why don't we end the market distorting preferential treatment of income from real capital gains?
written by static, January 03, 2013 9:27
So you were unhappy with the tax regime during the Clinton years and agitating for them to be lowered? I think this is simple loss aversion at work. We need to worry about the lower class and the unemployed, not the "middle class" making $250,000 per year. Obama's tax pledge is nearly as dumb as Norquist's.

Of course, the point on health care costs is well taken. Funding HSAs for most costs and allowing us to shop for value, taking away the losses from the third party payer system, be it flat co-pay private insurance or Medicare, allowing disruptive innovation on the low cost side to happen. These are the conditions we need to create, not a fragile, top-down system.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.