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Taxes and Incentives

In a NYT op-ed titled “I Can Afford Higher Taxes. But They’ll Make Me Work Less,” Harvard’s Greg Mankiw explains that, while he makes enough money and lives a sufficiently modest lifestyle that he wouldn’t miss the money from a modest hike in the top marginal rate, he’d stop doing a lot of the productive work he now does.

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.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

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?

By contrast, without the tax increases advocated by the Obama administration, the numbers would look quite different. I would face a lower income tax rate, a lower Medicare tax rate, and no deduction phaseout or estate tax. Taking that writing assignment would yield my kids about $2,000. I would have twice the incentive to keep working.

Kevin Drum argues, rightly I think, that this isn’t very compelling.

Do you see the card he palmed? Basically, the effect of letting the Bush cuts expire is so tiny that the only way to make it noticeable is to compound it over 30 years, which reduces the eventual payout of his writing assignment from $2,000 to $1,700. (And even that’s probably overstated, since it assumes Mankiw pays all his taxes at their full statutory rate, which virtually no one does.) The rest of the reduction down to $1,000 comes solely from the estate tax. But even on the heroic assumption that you should take this year’s zero rate as the baseline for comparison, the estate tax has an exemption of several million dollars. Unless Mankiw leaves his kids a helluva lot more than they need for a down payment on a house, they won’t pay a dime of estate tax.

It’s actually much worse than that.   First, even if the Bush tax cuts don’t expire, Mankiw will still pay 35% on the new income, not 0%.   The difference is between getting to invest $650 and $604.   That’s not nothing, by any means, but it’s not as stark as assuming $1000.   Second, he’s calculating in a myriad of other policies that aren’t really on the table.

Moreover, most of us aren’t like Mankiw.   Despite his enormous success, he’s still been in the same house since 1987, doesn’t own a vacation home and has no desire for the trappings of a wealthy lifestyle.   That’s not normal!   Most of us find a way to spend more money as our income increases.    If government takes a somewhat larger chunk of what we have, it arguably incentivizes us to work even harder since we now need to gross more to net the same.   Now, that’s probably not true at confiscatory rates.   If the marginal dollar was being taxed at 91% — as it was from 1951 to 1963 — or even 70% — as it was from 1965 to 1980 — then it may well not be worth the effort.   But the difference between the current 35% and the 39.6%  we experienced from 1993 to 2000 wouldn’t keep me on the sidelines.

Now, I happen to prefer that Mankiw get to keep as much of the money that comes from the fruit of his labor as possible.   And that goes double for Joyner!

But, the fact remains that the United States federal and state governments perform some necessary and useful functions that have to be financed somehow.     I don’t think the fact that he “can afford it” is a reason to penalize Mankiw.   But, even if we had a flat tax in place on income at both the state and federal levels and got rid of capital gains and estate taxes altogether, the fact of negative incentives would remain.    Money beyond that level to maintain Mankiw’s desired lifestyle would be discounted by the fact that government is going to get a large cut.

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He has a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. John Personna says:

    Yeah, who cares about debt and deficit! It’s “penalizing” to pay our bills, so we just shouldn’t.

    You’ve got the Repub 2010 vibe on this one James. It’s a new take on “deficits don’t matter,” this time because it hurts (Greg) to pay them.

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  2. Brummagem Joe says:

    I read Mankiw’s piece where he indulged in some sleight of hand (for instance rolling his MA health contributions in with his tax take) so immediately dismissed it for what it was. A bit of propaganda. It’s a pure guess of course but he probably makes around $750,000 and assuming a max on his deductions the adjustment in the two top bands is probably going to add about 4-6% to his total Federal tax bill. Hardly sufficient for him to cancel his attendance at conferences in exotic places and stays in lavish hotels at the organizer’s expense.

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  3. James Joyner says:

    @john personnaYeah, who cares about debt and deficit! It’s “penalizing” to pay our bills, so we just shouldn’t.

    That’s pretty much the opposite of what I said. Indeed, I say that the fact that taxing creates disincentives to work doesn’t negate the need to fund necessary and valuable government spending.

    I happen not to think “he can afford it” is a good justification for taking more of someone’s money. I tend to support a flatter system or, better still, one that relies of taxing consumption rather than production. But the need to fund government will impact our incentives regardless of how we structure the system.

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  4. EJ says:

    “If government takes a somewhat larger chunk of what we have, it arguably incentivizes us to work even harder since we now need to gross more to net the same.”

    Though supply sider claims regarding the effects of tax rates have often been exaggerated over the years, for the above statement to be true in general would mean a violation of the Law of Supply. Making this claim would be the equivelant of saying that if tax the production of cars, more cars will be made. The real argument is not whether higher taxes disincentivize a given activty or not, but rather just a matter of what degree they do.

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  5. John Personna says:

    Is this the same James that posted on marginal tax rates being at historic lows, or is someone subbing?

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  6. James says:

    Unless Mankiw leaves his kids a helluva lot more than they need for a down payment on a house, they won’t pay a dime of estate tax.

    Explain how 55% Estate Tax is Constitutional (Fraud)?
    They takes you money and set their salaries?

    You have Ten Eggs and Government gets to take 6 eggs, we the people did not create
    14 Trillion in Debt, trying to prop up 20% of the Economy :)

    Excess Capital in Gov hands is non productive.
    Excess Capital in Free Market very creative.
    Government Shovel and Wheelbarrow, Free Market, (Bulldozer) Highly productive

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  7. Brummagem Joe says:

    James says:
    Monday, October 11, 2010 at 11:29

    “Government Shovel and Wheelbarrow, Free Market, (Bulldozer) Highly productive”

    If James had been around in the 20’s no one would ever have heard of Maynard Keynes.

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  8. Steve Plunk says:

    Mankiw’s example is non typical but it illustrates how bad it can be for earners and there investments. The fact is higher tax rates will have an effect on productivity from certain people and it will certainly have an effect on investment and savings growth.

    The deficits and debt never had anything to do with lack of revenue but rather uncontrolled spending. There is no moral basis for such high rates any longer. Our government has spent and borrowed at such levels they have essentially voided the social contract regarding citizenship and taxation. Why continue to smile and pay your taxes when you know the government willfully mismanages it’s financial house?

    The better way to look at Mankiw’s $1000 is to think what good the whole amount would do if left entirely in the private sector. There’s some real stimulus. A thousand dollars at a time.

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  9. John Personna says:

    Steve, “never had anything” fails basic accounting.

    Now, if you’d like to reduce spending and taxes together, democratically, I’d be fine with that.

    Just set current tax to match current spending (with some counter-cyclical component). To do otherwise is to shirk “fiscal sanity.”

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  10. Brummagem Joe says:

    Steve Plunk says:
    Monday, October 11, 2010 at 11:42
    “Mankiw’s example is non typical but it illustrates how bad it can be for earners and there investments…The fact is higher tax rates will have an effect on productivity from certain people .”

    Mankiw sure is non typical in that he is in the top 2% of income earners…and it’s not a “fact” at all, it’s just an assertion being made by you. Most large income earners are barely aware of marginal shifts in their tax liabilities. You clearly don’t know that the tax take from the top 1% of income earners in the country is around 16%. What’s your tax bite?

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  11. John Personna says:

    BTW, what do you suppose happens in a loose labor market when a supplier like Mankiw steps down? Do you suppose someone like Will Wilkinson might be ready to step up.

    It fails market economics (see today’s Econ prize) to think total economic activity simply contracts.

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  12. An Interested Party says:

    “…we the people did not create 14 Trillion in Debt…”

    Oh, it’s all the politicians’ fault, eh? And who voted them into office, other than
    we the people? Martians, perhaps…

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  13. wr says:

    Plunk — Your anguished cry might be more compelling if tax rates weren’t currently at historically low levels. The country was doing just fine when the top marginal rate was in the 90% range. Now it’s much less than half of that and the right just keeps on whining about this as a “moral” issue because there is no factual basis to argue on.

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  14. ponce says:

    All the right-wing economists in the world could be replaced by parrots who yell out, “Lower taxes on the rich!” periodically and productivity wouldn’t suffer a bit.

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  15. James says:

    add about 4-6% to his total Federal tax bill.:
    This is Growth in Government, Remember
    Ross Perot well the ****ing sound is still in action.
    4-6% Growth in Private sector would create many Millionaire,
    4-6% Growth in Government will create more (Ruling Elite) millionaires.

    No all Ruling Elite have seats in the halls of Congress :)

    14trillion Debt and growing, hope you like the Debt.:)

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  16. legion says:

    Do you see the card he palmed? That’s not the only card, either… as some others have noted, Mankiw only pays that high marginal rate on the mythical $1000 because he’s already in the top income bracket before he starts. That’s a “problem” I think few people on this blog (let alone in America) have. Not to mention the fact that he deliberately obfuscates the issue by bringing the Estate Tax into an Income Tax rant.

    As far as intellectual dishonesty goes, he’s right up there with Steve Plunk. Back in the middle of the last century, when US industry was expanding so dramatically through the 50s and 60s, income taxes at the highest brackets were nearly _double_ what they are now. And that generation (the folks who fought WWII) _still_ managed to plow massive amounts of their money into capital expansions. The generation that holds the wealth now – the baby boomers – doesn’t spend their income that way, at least not in this country. If “left in the private sector”, that $1000 would go into a non-taxed overseas bank account, or to pay the salaries of about 500 Asian sweatshop workers. It wouldn’t do Jack for the US economy…

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  17. John Personna says:

    Did those billionaires funding the Tea Party make it in government?

    I’ve got nothing against billionaires, I used to work for one, but I find “little guy” AstroTurfing by them off-putting.

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  18. James says:

    If James had been around in the 20′s no one would ever have heard of Maynard Keynes.

    Homilies replace lack of knowledge.

    http://www.google.com/url?sa=t&source=web&cd=5&ved=0CB0QFjAE&url=http%3A%2F%2Fwww.bus.ucf.edu%2Fckelliher%2Ftax_5015%2Fexamples%2Fhistorical_tax_rates.pdf&ei=eT-zTMbgC8X_lgfMt-CaBw&usg=AFQjCNEsFovf4nVwkGeJXl2SlMh5R-DmkQ

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  19. Brummagem Joe says:

    wr says:
    Monday, October 11, 2010 at 12:03
    “The country was doing just fine when the top marginal rate was in the 90% range.”

    Actually top marginal rates are currently just over a third of that.

    “4-6% Growth in Private sector would create many Millionaire,
    4-6% Growth in Government will create more (Ruling Elite) millionaires.”

    As I said had James been around in the 20’s no one would ever have heard of Maynard Keynes. You should give Summers a call, he’ll be looking for assistants when he returns to Harvard.

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  20. Franklin says:

    Another problem with the analysis: very few if any corporations actually end up paying the 35% tax on “profits.” Far more likely: 0%.

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  21. anjin-san says:

    If only money were left in the private sector…

    Where banks could sit on it and not lend? Where major corporations could sit on it and not hire?

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  22. Brummagem Joe says:

    Franklin says:
    Monday, October 11, 2010 at 12:45
    “Another problem with the analysis: very few if any corporations actually end up paying the 35% tax on “profits.” Far more likely: 0%.”

    Likely none. The effective rate of corporation tax is in in the low teens I think. Something like a third of the largest 20 companies in the country paid no tax at all last year. When one reads some of this stuff it’s obvious that most of these guys have no grasp of the tax system at all. In fact one begins to wonder whether they are zombies that have been programmed to spout this nonsense or maybe they work in Republican boiler rooms somewhere and and are surfing sites like this to plant. It really defies belief at times.

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  23. Herb says:

    “The deficits and debt never had anything to do with lack of revenue but rather uncontrolled spending…….Our government has spent and borrowed at such levels they have essentially voided the social contract regarding citizenship and taxation. ”

    The “voiding the social contract” stuff is debatable, but you’re onto something with the uncontrolled spending. However, I do think all this concern about uncontrolled spending from the right is a case of “too little, too late.”

    I didn’t hear one peep about uncontrolled spending as they were unloading pallets of cash in Baghdad or building those schools the media never reported on. I didn’t hear any complaining about “uncontrolled spending” as George W. Bush gave $2.2 billion to tax-exempt churches (and that was just in FY 2005! The budget has since increased).

    The right seems to only be concerned about spending when their political opponents are doing it.

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  24. EJ says:

    “Something like a third of the largest 20 companies in the country paid no tax at all last year. ”

    That would be because many corporations lost money last year. How dare GM not pay income tax on their non existant income?

    And the numberous other variations of this “fact” that has been floating around the internet for years also doesnt take into account S-Corps and LLCs that get taxed at the individual level.

    The US corporate tax cose is indeed loaded with deductions and loopholes. But when It comes to deciding whether to expand ones business, it is not the total tax bill that matters but rather the marginal rate on the new activity. Thats where the 35 percent number comes into play, because that is what the new output with be taxed at.

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  25. Steve Plunk says:

    EJ, Good point but we should also remember many companies pay taxes regardless of turning a profit or not. Add my property taxes, payroll taxes, road taxes, excise taxes, city fees, fuel taxes, along with others and my pre-profit taxes amount over 10% of revenue. MOst corporations are in the same boat.

    What really bothers me is liberals who fail to appreciate what a private sector company does besides let itself be milked of taxes. We not only provide goods and services but we also employ people. Even if companies never paid another dime in taxes it can be argued they do enough for society anyway. All of our wealth as a country originates within the private sector so I find the Left’s complaints about low taxes and fat cat owners lacking of reason.

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  26. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 13:33
    “That would be because many corporations lost money last year. How dare GM not pay income tax on their non existant income? ”

    And did Exxon and GE have non existent income last year. Even Forbers was mildly shocked.

    http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes.html

    “Thats where the 35 percent number comes into play, because that is what the new output with be taxed at.”

    And this is nonsense too btw. If GE opens a new factory to manufacture widgets it’s not treated as some new business in their accounts but it’s P and L would be aggregated into that of the Widget division and ultimately the entire company accounts.

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  27. EJ says:

    “And this is nonsense too btw. If GE opens a new factory to manufacture widgets it’s not treated as some new business in their accounts but it’s P and L would be aggregated into that of the Widget division and ultimately the entire company accounts.”

    But unless that new marginal widgit making is receiving a subsidy, then the new income will be taxes at 35 percent. Decisions are made on the margin. This is basic economics.

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  28. EJ says:

    This is no different then your personal taxes. My personal effective income and payroll tax rate is somewhere around 18 or 19 percent if i remember correctly. But If I get a raise, that income is taxed at 38 percent. Im adding state, federal and payrol taxes. The same applies for coporations. If they do something to enhance income, they are being taxed at the marginal rate.

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  29. Dave Schuler says:

    It’s remarkable to me how much of this discussion is moot. According to the IRS something like 85% of families making more than $200,000 in income are two-earner families and the preponderance of those fall into the lower end of that income range. How many hourly workers are there at this income level?

    My sense is that most of those people are salaried. That means that work effort is only indirectly related to income. If they work 40 hours a week, they receive their salary. If they work 80 hours a week, they get the same salary. I wouldn’t be a bit surprised if many of these people are working for more than 40 hours a week already.

    My point is only that compensation is far less elastic than Dr. Mankiw seems to be suggesting.

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  30. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 14:07

    “But unless that new marginal widgit making is receiving a subsidy, then the new income will be taxes at 35 percent. Decisions are made on the margin. This is basic economics.”

    This depends entirely on how efficiently you shelter it and what’s going on in the rest of P and L.

    “This is no different then your personal taxes. My personal effective income and payroll tax rate is somewhere around 18 or 19 percent if i remember correctly. But If I get a raise, that income is taxed at 38 percent.”

    What utter rubbish. It depends on bands your in. You don’t even know apparently that the top marginal rate is currently not 38% it’s 35%

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  31. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 14:11
    “This is no different then your personal taxes. My personal effective income and payroll tax rate is somewhere around 18 or 19 percent if i remember correctly”

    for info these are the 2010 rates.

    http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Year_2010_income_brackets_and_tax_rates

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  32. John Personna says:

    FWIW, I think Behavioral Econ has significantly devalued the old view that some kind of rational decisionmaking actually takes place at the margin, especially for something like this.

    Does Mankiw actually write for incremental profit? Or out of political impules? Or to signal his position? How many of the above?

    As Dave says this story has limited relevance.

    I say those writers who criticize this carefully constructed storyline are right, for more reasons than any one of them covers.

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  33. anjin-san says:

    I know I am planning on quitting my job and going to work at Taco Bell…

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  34. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 13:33

    And EJ I can tell you from personal experience that corporation tax has next to zero impact on whether you decide to expand or not.

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  35. Zelsdorf Ragshaft III says:

    John Personna, if you believe what you posted above you need to seriously quit drinking the koolaid.. It is your side which utilizes unions to bus people to events, leaving gross messes for others to clean up. But then personal responsibility is not the hallmark of progressives. Anjin, corporations do not pay taxes per se. They pass these costs along to the consumer. Funny, if you had your way and the system you would like to see implemented in the U.S. were to happen. What you do for a living would be eliminated and the only question would be whether you would pull or push the plow.

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  36. EJ says:

    Brummangem,

    If you bothered to read what I said, you would notice this line:

    “Im adding state, federal and payrol taxes.”

    Thats how you get to 38%.

    If I made the money as a side business and had to pay my full payroll tax, the margin would be even higher at close to 45%.

    The prospect of losing almost half of what you make is definetally a deterant to doing such activity. It was one of the reasons why I stopped a brief dabbling in a side business a few years ago.

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  37. EJ says:

    and “effective rates” are the average rate. You do know how income tax works right?

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  38. john personna says:

    But EJ, isn’t what you describe, the total tax burden, also at or near our historic low?

    Again, why the heck do people complain about a historic minimum on the basis of it hurting too much, or being too much of a disincentive?

    If that rate (and all above) were an authentic disincentive then the American 20th century never would have happened.

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  39. john personna says:

    That was a fails Zel, on many levels.

    The principle one was that I didn’t certify for you that the Dem charges were correct. I just said if they are proved. If you can’t handle that … I don’t know what to do.

    You understand that if they are not proved then we’ll have another outcome, right?

    You do want to certify that other outcome now. Are you our Chamber insider? You’ve seen the docs?

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  40. EJ says:

    the effecttive income tax rate (not property taxes) is indeed near a modern era historic low right now (but that has more to do with a stagnent economy. Due to bracket creep, even with the Bush cut rates, the amount of tax collected as a percent of GDP in 2007 was the same as the mid 90s with the higher Clinton rates). http://perotcharts.com/category/challenges-charts/page/11/

    But I’m not sure thats what most people are really complaining about at the moment. Most of the compaliants are about increases in the marginal rates (whish is what comes into effect when increasing output) or that we are spending amounts way above the historical norm and borrowing is just future taxes.

    You are not hearing from me that current effective tax rates are any higher than they have been in the recent past. I just forsee much higher rates in the intermediate future.

    My bone to pick in this thread is that many people dont realize that decisions are made on the margin so that the 35% rate is important because thats what new output is taxed at. And this is something that companies have to consider when making expansion decisions. If I were redoing the tax code, I’d remove most of not all deductions and then lower the rate substantially.

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  41. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 14:50
    Brummangem,

    If you bothered to read what I said, you would notice this line:

    “Im adding state, federal and payrol taxes.”

    I did read it but since it was such an obvious stacking of the deck and isn’t related to tax bands anyway I ignored it. You obviously don’t know what the tax bands are since think the top rates are 38%; don’t know that the fact several major companies paid no tax last year is not a fantasy; and seem to think that how companies manage their tax affairs is based on economic theories. In fact you’re fairly clueless on the basis of your comments.

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  42. john personna says:

    Re. what people don’t understand about 35%, I retired early because I thought I had enough. Would somebody be going over the data and saying I did it because of tax rates? I didn’t. I did it based on the size of my nest egg, and my understanding of safe rates of withdrawal.

    The only time I worried about tax rates was when I had to make a decision about which year(s) to book income in, during the dot-com. We haven’t seen that aspect above have we? I bet Greg has some flexibility there, as well as an ability to get his family on as staff and co-writers and to get some income directed to them without interim death and taxes.

    So no, not only is the behavioral stuff a fuzz on that old time rational at the margin religion, there are a whole raft of other things going on as well.

    BTW, I was a progammer. When I retired do you suppose my employers just wrote fewer programs? Or do you suppose they pulled from the labor pool and hired someone else?

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  43. john personna says:

    For redundancy, this idea that a single worker taking time off work to go fishing is a drain on the economy as a whole is crazy. There are other workers. It costs money to go fishing.

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  44. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:04
    “the effecttive income tax rate (not property taxes) ”

    These are totally separate taxes, I’m surprised you haven’t rolled in state purchase taxes, DMV taxes, airport taxes all of which are probably at historic highs too. This is all bs just like trying to roll in FICA with income taxes or Mankiw including his health contributions.

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  45. EJ says:

    Brummagem Joe ,

    I was talking about MY personal tax rate. If you don’t know how to read than that is your problem. When talking about marginal behavior, it is the summed marginal tax rate that counts. So in my case it is 25% federal + about 7% FICA plus about 6% state = 38%. So If I get a raise, I pay 38% on it.

    The point being that though my average or effective tax rate, which is simply my total tax payed devided by total income, is about 18-20%, my marginal rate on new income is 38%.

    Likewise, though the effective rate for corporations is considerably lower, the marginal rate is 35% (plus whatever the state income tax rate is). And this is the rate that new income from expansion is taxed at (unless said activity is being subsidized), just like any side income I may earn is taxed at the marginal rate.

    That was the point of the analogy. Is this too difficult for you to comprehend?

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  46. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:04
    “My bone to pick in this thread is that many people dont realize that decisions are made on the margin so that the 35% rate is important because thats what new output is taxed at.”

    Bollocks

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  47. john personna says:

    So EJ, if you go fishing, at the margin, what do you think will be the impact on the economy as a whole?

    Where would you go? I’d guess a trip to the Turks and Caicos for bonefishing would be very stimulative!

    Really, a lot of these undergrad econ stories are “just so.” They try to drill in the top level concept, that some things do indeed shake out at the margin as rational decisions, but they can’t really guarantee that they all do, or that a particular one will.

    I’m going to say the employment one is a particular lie. Most people work as much as they “can” by some personal defintion of “can” (including family commitments, work availability, dedication to recreation, etc.). To say that my buddy the surfer isn’t working because of the marginal rate would be to go all Rain Man on his situation.

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  48. EJ says:

    If you want to deny the last 300 years of understanding know as the Law of Supply than there is nothing I can do for you.

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  49. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:18
    Brummagem Joe ,

    “I was talking about MY personal tax rate. If you don’t know how to read than that is your problem. When talking about marginal behavior, it is the summed marginal tax rate that counts. So in my case it is 25% federal + about 7% FICA plus about 6% state = 38%. So If I get a raise, I pay 38% on it.”

    I understand exactly how you were stacking the deck to muddy the water, but this is a discussion about Mankiw’s contention that an increase in the two top bands might affect his behavior or yours assuming you are affected. I did some some back of envelope calcs a few weeks back for folks earning up to around 500k and it’s another 3% on their tax bill which is chicken feed.

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  50. john personna says:

    EJ, you are making a false argument.

    You are saying since X is a cause, along with Y and Z, then X is the only cause.

    Get it?

    300 years of economics did not prove margial return was the only factor in human markets. Far from it.

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  51. EJ says:

    john,

    As I said in my first post, I am the first to admit that the supply side arguments over the past 30 years have indeed exagerated the effects of marginal tax rates. The supply of labor is generally inelastic. So, on net it doesnt change behavior much that much when tax rates rise. But it does to some extent. And all labor is not the same. Yes, if you raise my tax rate on my 9-5 job, I really cant do much to change my behavior. Im going to work the same amount. But what about me doing some work on the side? I may make a decision that giving up my time isnt worth it.

    Likewise, many small business owners have the ability to compartmentalize their work. Maybe instead of working 6 days a week I work 5? Or maybe instead of opening up a business, I stay in the corporate world? Maybe a high income earning executive decides to retire early to his yaught because its no longer worth to to him? Maybe a stay at home mom decides to stay with the kids rather than work because its not worth it?

    Tax rates do have an effect on behavior in the agragate. Its just a question of to what degree. Generally speaking, more substitutes a person or company has in response to the tax, greater the behavior change will be.

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  52. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:24
    “If you want to deny the last 300 years of understanding know as the Law of Supply than there is nothing I can do for you.”

    I’m slightly familiar with it but it just doesn’t have much to do with how extra output might be taxed in the real world or indeed on how investment decisions are arrived at.

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  53. EJ says:

    john,

    When did I say tax rates are the only thing effecting business behavior?

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  54. john personna says:

    Recommended, for those who wish to learn about the common “anomolies” that shape our human markets:

    http://www.amazon.com/Winners-Curse-Paradoxes-Anomalies-Economic/dp/0691019347

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  55. john personna says:

    EJ, you said everyone should get that the marginal tax rates were affecting work preferences, and I made a counter-argument. You came back that I was ignoring supply and demand.

    No, if you look again I acknowledged it and then listed some other factors in play.

    Do you acknowledge those other factors?

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  56. john personna says:

    (I thought the “300 year” thing was directed at me.)

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  57. john personna says:

    (and I missed your 15:31 comment first time.)

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  58. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:31

    “Tax rates do have an effect on behavior in the agragate. Its just a question of to what degree. ”

    They can have an effect of course but not in small shifts we’re talking about. A 3% increase in the total tax bill of a couple making 500k isn’t going to make an iota of difference to their lifestyle or behavior.

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  59. EJ says:

    John,

    300 years was not directed at you. I appologize if there was confusion.

    It was directed at Joe who claims that businesses dont take into account tax rates, which is absolute BS. I work in financial services, and I can tell you that “after tax rate of return” is definetally something that is taken into consideration.

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  60. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:31
    ,

    “When did I say tax rates are the only thing effecting business behavior?”

    Oh you weren’t intending to give the impression it was an awfully big deal that would materially affect investment decisions. I wonder how I got that impression?

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  61. john personna says:

    Well, I’ve had enough for today. For me it comes down to two simple points:

    1) low historic tax rates

    2) high historic deficit and debt

    Those seem to add up, 1 + 2 = 3

    3) bite the bullet, let the tax cuts expire

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  62. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 15:37
    John,

    300 years was not directed at you. I appologize if there was confusion.

    “It was directed at Joe who claims that businesses dont take into account tax rates, which is absolute BS. I work in financial services, and I can tell you that “after tax rate of return””

    I never claimed any such thing. Of course businesses take into account after tax rates of return but that doesn’t mean they expect ALL the income from their expansion to be taxed at 35%. And in the scheme of things taxes in our domestic economy are fairly low on the totem pole of factors affecting investment decisions. I’ve been involved in a bunch and taxes are usually a peripheral issue unless they involved breaks or subidies.

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  63. Brummagem Joe says:

    This by the way is what you said. You work in financial services and you think net taxes on all new output are at 35%. Interesting.

    EJ says:
    Monday, October 11, 2010 at 15:04
    “My bone to pick in this thread is that many people dont realize that decisions are made on the margin so that the 35% rate is important because thats what new output is taxed at.”

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  64. EJ says:

    In the absence of a subsidy or deduction of some kind related to the new activity, any increase in corporate income is indeed taxed at 35%. That is true.

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  65. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 16:13
    “In the absence of a subsidy or deduction of some kind related to the new activity,”

    The difference between theory and practice as you well know. There are, as you mentioned earlier, a mountain of deductions and loopholes. You’re game playing as you were with the personal tax question. Few if any companies are paying full corp on their income which is how GE ended up paying no taxes last year. Apparently you’re not clueless, just obfuscating.

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  66. Brummagem Joe says:

    “There are, as you mentioned earlier, a mountain of deductions and loopholes.”

    And lots of shelter strategies too.

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  67. Brummagem Joe says:

    EJ says:
    Monday, October 11, 2010 at 16:13
    “In the absence of a subsidy or deduction of some kind related to the new activity,”

    I’d also add btw that if an investment decision hinges on relatively minor shifts in your prevailing rate of corp, it’s not going to get beyond first base anyway.

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  68. [...] James Joyner noted the now much-discussed thought experiment by Harvard economist Greg Mankiw as to whether letting the Bush tax cuts expire on the top marginal rate will lead to Mankiw working less because of the tax burden on his top marginal income going from 35% back to 39.6%. [...]

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  69. [...] James Joyner noted the now much-discussed thought experiment by Harvard economist Greg Mankiw as to whether letting the Bush tax cuts expire on the top marginal rate will lead to Mankiw working less because of the tax burden on his top marginal income going from 35% back to 39.6%. [...]

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  70. anjin-san says:

    > What you do for a living would be eliminated and the only question would be whether you would pull or push the plow.

    In other works, I would still be a producer, and you would still be living off government checks.

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