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Home Publications Blogs Beat the Press If The Bush Tax Cuts on the Rich Expire, Will Gregory Mankiw Write Less?

If The Bush Tax Cuts on the Rich Expire, Will Gregory Mankiw Write Less?

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Sunday, 10 October 2010 21:49
Gregory Mankiw, formerly President Bush’s top economist, raised this question in his NYT column this week. I’ll resist the obvious temptation to pronounce this a win-win and deal with the issue at hand.

Mankiw explains in his piece that the various tax increases (income, capital gains, and estate taxes) would substantially reduce the percentage of any additional income that he could pass onto his children, which he says is his main motivation in earning money. Therefore higher taxes will give him less incentive to write. His point being that many other high-income workers will be in the same boat.

Brad DeLong ably dealt with the basic issue as to whether taxes can be separated from spending over the long-term, as Mankiw’s discussion seems to imply. (They can certainly be separated in periods of high unemployment like the present.) But, there are several other issues to raise.

First, the relevant factor determining work effort is after-tax income, not tax rates. As a result of a number of policy decisions (e.g. protecting highly educated workers from unrestricted international competition, strengthened patent and copyright protection), Mankiw is likely to enjoy a higher after-tax wage even with the repeal of the tax cuts than he would have earned 30 years ago if Bush era tax rates were in place.

If taxes on gambling were applied to gambling on Wall Street, in the form of a modest financial speculation tax, it would drastically reduce the volume of trading. This would substantially reduce the demand for workers with advanced degrees in the financial sector.

Since the financial sector employs a high percentage of the workers with advanced degrees, a financial speculation tax would likely put downward pressure on the wages of people with advanced degrees across the board. An unfortunate aspect of the debate on tax policy is that it leads the public debate to focus on tax rates while ignoring the much more important policy decisions that determine the distribution of pre-tax income.

The second point is that the income/wealth effect of lower taxes may cause Greg and/or his children to work less. This effect is difficult to measure. In any given year, a lower tax rate may cause people like Greg to work more, but this could be different if they accumulate substantial additional wealth as a result of lower tax rates. Greg tells us that his main motivation is to accumulate enough wealth to ensure that his three children can enjoy a comfortable standard of living.

Suppose that he had already accumulated enough wealth for this purpose because the tax rates had been low for a long time. How many columns would Greg be writing then? Alternatively, can we expect as much work out of Greg’s well-educated kids if he provides them with a substantial inheritance as opposed to a situation where they had to work to make ends meet like the rest of us? Or, taken the other way, would Greg be writing as many columns today if his parents had handed him enough money so that he did not have to work to ensure a comfortable standard of living for himself and his children? We don’t know the answer to this one, but Greg certainly gives the issue short shrift in his discussion.

Finally, there is the issue of quality that Brad raises in his blognote, but doesn’t pursue sufficiently. If we pay writers by the word, then we would expect writers to write long books and articles. That’s great if we want long books and articles, but it is not necessarily a way to get good books and articles.

If economists, and others like them, are motivated primarily by money then they will do work that gets them money. This does not necessarily correspond to good economics. Many of the most creative workers received very little if anything in compensation for their work. Think of Vincent van Gogh, Charlie Parker, and Franz Kafka. Suppose we offered these great artists large sums of money for each piece they produced. Would they have produced better work?

I don’t know the answer to that one. I am not arguing that creative workers should live in poverty, only that many of the most creative people in history were motivated first and foremost by a commitment to their work, not by money. It certainly is not obvious that they would have been more creative if they thought there was more money at stake.

Comments (15)Add Comment
Intrinsic motivation
written by Arista, October 10, 2010 10:29
Alfie Kohn's _Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes_ examines the question of extrinsic vs. intrinsic motivation in the workplace, child rearing, and education. The book does so interestingly and in depth. It sounds as if Dr. Mankiw could learn a great deal from it.
Liberal democracy has never dared face the fact that
written by Scott ffolliott, October 11, 2010 12:18
Liberal democracy,’ Robert Lynd wrote twenty-five years ago, ‘has never dared face the fact that industrial capitalism is an intensely coercive form of organization of society that cumulatively constrains men and all of their institutions to work the will of the minority who hold and wield economic power; and that this relentless warping of men’s lives and forms of associations becomes less and less the result of voluntary decisions by “bad” men or “good men” and more and more an impersonal web of coercions dictated by the need to keep “the system” running.’ – The State of Capitalist Society p. 74 c 1969 - Ralph Miliband
...
written by diesel, October 11, 2010 12:48
This fellow provides a fine example of the misuse of economics, that is, to be used in the ignoble task of calculating one's life effort.
...
written by Ron Alley, October 11, 2010 6:58
Dean,

This is just a great example of GOP rhetoric. Mankiw's comment is aimed at the broad swath of the population with less interest in, and knowledge of, economics than the Dean Bakers of the world as well as a substantially smaller annual income . Mankiw argues a tax increase which would decrease his net income would make him less willing to work. He invites the reader to consider how the reader would respond to a reduction in income. The clearly fear and reject a reduction in their net incomes.

In fact many have had reductions in their net incomes over the past several years. The fallacy in Mankiw's reasoning is that Mankiw's conclusion clearly is false within their own experience. When their wages and hours were reduced, they did not stop working hard to support their families. They increased their efforts because they knew their families depended upon their work.

Their increased effort is not an indication that they were happy with reduced wages and hours. They were troubled and they expressed greater discontent with their job and their employer. Further they realized that the Obama administration has been of little assistance

The argument plays on their fears that their taxes may be increased as well. Fears, and fear based responses, usually are irrational.

...
written by David S., October 11, 2010 8:28
Mankiw's column can also be attacked as sloppy microeconomics.

The issue he raises is the change in the "marginal" tax rates if the Bush tax cuts for the wealthy are allowed to expire as intended.

However, he then analyzes how existing tax rates have reduced his net income -- a "total revenue" analysis. what does that have to do with this particular "marginal" analysis of a change in rates?

Based on Mankiw's statements about his own incentives, it would appear that he believes that tax rates are already discouraging him from engaging in further output. If so, then the additional marginal tax rate increase may have little effect on his output and society would be a net winner by taxing him a little more on percentage terms.

Another missing piece in his analysis is ihis failure to disclose how much time (i.e., sacrificed leisure or other opportunity cost) he utilizes to engage in revenuw-producing activities. If he is already working full-time, it may be that he passes on the $1,000 essays because there are more lucrative opportunities for him.

Finally, he gives no mention to the substitution vs. income effects of a tax increase, to which Dean alludes in his post. If Mankiw wants to provide for his children, but tax rates reduce his income and the marginal return of that activity, he may choose to substitute more work for leisure in order to "satisfice" or to "maximize" as he wishes. To be sure, such a tradeoff may seem worse to Mankiw than his tradeoff before the increase, but the whole point of the exercise (we have now come full circle!) is that the wealthier are better able to absorb tax increases needed to fund necessary government spending.

...
written by izzatzo, October 11, 2010 8:47
First, the relevant factor determining work effort is after-tax income, not tax rates. As a result of a number of policy decisions (e.g. protecting highly educated workers from unrestricted international competition, strengthened patent and copyright protection)

Mankiw is likely to enjoy a higher after-tax wage even with the repeal of the tax cuts than he would have earned 30 years ago if Bush era tax rates were in place.


In attempting to explain an essential axiom of neoclassical economics - that supply curves indeed slope upwards due to incentives to work more at the margin for more pay - Mankiw fails to recognize what the "work" is actually for in regard to the protected professional class.

It's economic rents so large earned over time, particularly the last 30 years, they're large enough to overcome and suppress unitary tax rates at the margin as the key driver of incentives to "work".

Whether Mankiw is paid and taxed by the word or articles written misses the larger point, that his underlying "fixed salary" in society determines his capability to casually vary his income at the margin, like deciding whether to drive the Ferrari only every other weekend instead of every weekend.
Tax Me More
written by Ethan, October 11, 2010 11:48
Seems to me that if you tax me more, I'll work more to have the same after tax income and the same standard of living. If you tax me less, I can slack off and still enjoy the same standard of living -- assuming I already "enjoy" that standard.
Hope springs eternal
written by Matías Vernengo, October 12, 2010 12:38
After I read his piece I thought CEPR should send a petition around. If nothing else they shouldn't extend the taxes to get rid of Mankiw!
...
written by liberal, October 12, 2010 9:52
izzatzo wrote,
It's economic rents so large earned over time, particularly the last 30 years, they're large enough to overcome and suppress unitary tax rates at the margin as the key driver of incentives to "work".


Yep.

One of the biggest problems with economists today is the failure to understand, or to acknowledge, the role of rent in a modern economy. (Even Dean succumbs to this, as when he claims home prices should shrink over time due to productivity improvements, just like for textiles---ignoring the fact that the supply of land is fixed, if not the tech for structures.)
I work less because of the wealth effect
written by anonymous, October 14, 2010 8:50
I and my brothers are examples of people who works less because of inherited money, the kind of money that Mankiw hopes to give to his kids. My grandfather founded a very successful business and my two brothers and I each inherited roughly $1 million. Before he died, our grandfather paid full-fare for our college educations. We will each also inherit significant amounts of additional money when our parents die. My older brother is now a doctor working long hours (for high pay) but he spent many years before medical school either not working for pay at all or working less than year round, maintaining himself on his inheritance. Also, unlike most medical school graduates who must incur debts over $100,000, he was able to graduate debt free. My younger brother, who graduated from his PhD program debt free, works about 5 months a year on research projects, spending the rest of his time doing things like building a cabin in the woods. (Which is hard work in the literal sense, since he cuts the logs and mills them into lumber himself, etc, but he'd never be able to have the time to do it if he had to rely on a paycheck like most people.) I also graduated from a master's degree program debt free, and after working several years at a regular 9-5 job, have recently become "self-unemployed," doing a few odd freelance jobs here and there but mostly living and financially supporting my family (my wife works part time; we have two kids) on my inheritance. I plan to start a business soon, involving some inventions I've come up with. None of them will generate millions of dollars or result in the employment of thousands of people. As Dean indicates, my inspiration is simply that I find pursuing them personally satisfying as a creative expression. The money they will bring me will be modest at most, and unnecessary in the reality of my finances as long as I don't do anything utterly foolish. Oh, and about the fairness of the tax structure in the US? I paid a whopping total of $119 in income taxes in 2009 on total income of just under $100,000. In my case, at least, those tax cuts on "investment" income (all of which I inherited) haven't generated the slightest bit of job creation. All they've allowed me to do is live like a comfortable retiree even though I'm just 40 years old. Whatever this is, it has nothing to do with Locke's theory of justifiable private property rights.
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ot the tech for structures
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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.

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