« One of These Things is Not Like the Others | Main | links for 2010-10-10 »

Sunday, October 10, 2010

Is It Really the Money?

Greg Mankiw complains that if taxes go up for people with incomes as high as his, he won't work as hard and that means he won't be able to leave as much for his kids. Incentives matter he says. If that's the case, I wonder why someone who is trying to take away the incentive for his kids to work hard and be successful on their own doesn't leave academia and become a high paid consultant.

I'm sure Greg Mankiw could clean up as a consultant. The same effort he puts into academics would be much more highly compensated somewhere else. The fact that he decided to become an academic in the first place indicates that it's not all about the money. 

As Greg Mankiw makes clear every chance he gets, he's at Harvard. That tells me that the return to his ego is every bit as important as the financial return. I'd further guess that even if the New York Times stopped paying him for his column, he'd write it anyway. It's a boost to his ego and reputation that he'd want even without whatever small payment he gets for each column (he could make more by using the time to prepare a talk "to a business group, consulting on a legal case, [or] giving a guest lecture," so the opportunity cost of the column is quite high).

But, I suppose we will see. If taxes do go up, I expect Greg Mankiw to give up his NY Times column -- he's implied it just won't be worth it -- so we shall see if he really means what he says:

Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers.

If taxes do go up and he doesn't give up the column, then we'll know he was mostly blowing smoke.

Oh, and did you hear that Greg Mankiw is at Harvard?

Update: Brad DeLong:

Greg Mankiw Quits the New York Times?, by Brad DeLong: An email from Mark Thoma saying that it sounds like Greg Mankiw is giving up his New York Times Economic View column because President Obama does not want to extend the temporary Bush tax cut on the marginal rates applied to high incomes.

It certainly sounds like it. The New York Times pays $650 a column and, Greg says, at anything less than the temporary Bush marginal rates on high incomes, that just is not enough:

Greg Mankiw:: AN important issue dividing the political parties is whether to raise taxes on those earning more than $250,000 a year. Democrats say these taxpayers can afford to chip in a bit more. Republicans say raising taxes on those who already face the highest marginal tax rates will hurt the economy. So I thought it might be useful to do a case study on one of these high-income taxpayers. Fortunately, I have one handy: me....

I can afford to pay more in taxes.... I have been very lucky.... I don’t have trouble making ends meet.... I am almost completely sated.... I don’t aspire for much more than a typical upper-middle-class lifestyle....

[B]ut I [do] hope to put some money aside for my three children. They will never lead lives of leisure, but I hope they won’t have to struggle to find down payments to buy their own homes or to send their kids to college. Suppose that some editor offered me $1,000 to write an article.... 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... assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes... the phaseout of deductions adds 1.2 percentage points... Medicare... 3.8 percent... 5.3 percent in state income taxes... the corporation in which I have invested pays a 35 percent corporate tax.... the estate tax.... Most likely... my kids will get... $1,000....

[W]ithout the tax increases advocated by the Obama administration... that writing assignment would yield my kids about $2,000....

Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.... Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply...

I think that this is a big mistake for two reasons: one moral-political and one economic-analytical.

Let me deal with the economic-analytical reason first:

First, start with the fact that tax on Greg's current writing earnings because he wants to leave more to his children in thirty years will be higher than today's current Bush-era tax rates. But they will not be higher because of anything Barack Obama has done or failed to do. They will be higher for three reasons. First, George W. Bush and his advisors--of whom Greg Mankiw was one--failed to find any spending offsets in order to pay for the temporary Bush reductions in tax rates. Second, George W. Bush and his advisors--of whom Greg Mankiw was one--enacted a very large long-term spending increase without figuring out any way to pay for it: Medicare Part D. Third, George W. Bush and his advisors--of whom Greg Mankiw was one--enacted a second very large spending increase when they responded to Al Qaeda by greatly increasing the size of a conventional military which is of not much use in our current struggle, and also did so without figuring out any way to pay for it.

As Milton Friedman liked to say, and as he did say when he--I am told--yelled at George W. Bush during his 90th birthday celebration at the White House--to spend is to tax. Will the spending, and you will the taxes. If somebody claims to have cut your taxes without cutting spending, do not believe them: all they have done is to shift taxes forward into the future, and made taxes on current consumption lower while making taxes on long-term transfers of wealth into the future higher.

The sooner taxes are raised in order to pay for Medicare Part D, the expanded U.S. military, other pieces of Medicare and Medicaid spending growth, and to offset the revenue lost over the past decade of the Bush temporary tax cuts, the lower the taxes on Greg's saving for his children's inheritance will be. That Barack Obama is taking some steps to restore fiscal sanity should diminish his view of the risk-adjusted taxes his long-run savings will pay, and make him more willing to write for the New York Times--not less.

But there is more. The two biggest long-run policies that Barack Obama has set in motion over the past two years have been (a) the entrenchment of future reductions in Medicare spending growth designed by the Independent Payment Authorization Board so that they can only be overturned by affirmative congressional supermajority votes to prevent them, and (b) the enactment of a growing and eventually very large tax on high-cost health-insurance plans. Now these policy changes may not survive--the Republicans are pledged, to a sophont, to repeal both of them. But if they do they greatly reduce the amount by which income and other taxes must rise over the next generation. And so they make the expected taxes on Greg's saving-for-his-children's-inheritance significantly lower.

If Greg wrote one column a month before Obama took these big steps to restore long-run fiscal balance to the U.S. federal government, the prospect of lower tax rates on his saving-for-his-children's-inheritance should induce him to write three columns a month now.

Second, Greg says that it's worth it for him to write columns if they generate $2000 in net bequeathed wealth in 2040 but not if they generate $1,000. But that shouldn't be why anybody writes columns. Indeed, if people write columns not because they are driven to inform and educate their readers but rather because it is a way to make money to leave to their children--well, then those columns will be written not to inform but to entertain, and so they will be worthless as sources of information and education (rather than as sheer entertainment) to their readers.

I do not think society can survive if the voices writing on political-economic issues in our public sphere are doing so not to inform but merely to entertain. I think that society can only survive if those who write columns are driven by a geas to make Americans better-educated citizens but rather to leave more wealth to your children. We ought to write columns not because we think our children will need extra money in thirty years, but because we think our fellow-citizens need better information now.

Indeed, I don't think America can long survive if we treat our contracts with newspapers merely as ones in which we craft words qnd they pay us money, and in which we craft our words to make as much money as we can.

Edmund Burke, I think, put it best when he said that society can only survive if at the very least it is a long-term partnership, and ought to have much more of social gift-exchange than that. As Burke wrote, we ought not to speak of a "social contract" in which each narrowly counts their contributions and benefits. And if we do speak of a "social contract," we must recognize that that is far from being a complete description:

Subordinate contracts for objects of mere occasional interest may be dissolved at pleasure; but the state ought not to be considered as nothing better than a partnership agreement in a trade of pepper and coffee, calico or tobacco, or some other such low concern, to be taken up for a little temporary interest, and to be dissolved by the fancy of the parties. It is to be looked on with other reverence; because it is not a partnership in things subservient only to the gross animal existence of a temporary and perishable nature. It is a partnership in all science, a partnership in all art, a partnership in every virtue and in all perfection. As the ends of such a partnership cannot be obtained in many generations, it becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born. Each contract of each particular state is but a clause in the great primeval contract of eternal society, linking the lower with the higher natures, connecting the visible and invisible world, according to a fixed compact sanctioned by the inviolable oath which holds all physical and all moral natures each in their appointed place...

    Posted by on Sunday, October 10, 2010 at 11:50 AM in Economics, Taxes | Permalink  Comments (98)


    Feed You can follow this conversation by subscribing to the comment feed for this post.