Mankiw on taxing the rich

Larry Ribstein —  10 October 2010

I suppose that the Obama tax plan is something this blog should stay away from.  But I can’t resist a note on Mankiw’s NYT column

Mankiw makes all the “correct” disclaimers:  he’s being “narcissistic,” yes he can “afford to pay more in taxes,” “I don’t have trouble making ends meet,” “I am almost completely sated.”  In other words, you can’t blame him for being whiny rich.  

Alas, for the supporters of Obamatax, there’s a sticky issue that still remains:  the tax will affect Mankiw’s incentives, because like a lot of rich people he can choose how much to do and how much to make.  Read the article to see how, and why. 

In other words, it’s not Mankiw that has a problem — it’s the people outside of his family who depend on him.  He notes that even if you don’t care how much an economist does, what about surgeons, orthodondists, singers, novelists? 

He concludes:  “Don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.” 

I would add: but don’t expect people to stop trying.

Larry Ribstein


Professor of Law, University of Illinois College of Law

12 responses to Mankiw on taxing the rich

    Michael Mahoney 14 October 2010 at 12:30 pm

    I wonder if Mankiw understands that he has just shot down the argument that capital gains should be taxed at preferential rates.
    Which was, you will recall, that investment was desirable economic activity that should be encouraged by tax preferences.
    Mankiw now says that ordinary labor, such as is performed by orthodontists, movie actors, and tenured university professors, is also desirable economic activity that should be encouraged by tax preferences.
    So ordinary income is entitled to the same tax rate as capital gains income.


    Once Greg mankiw has taken care of his basic needs and the governoment has taken care of its basic needs (police, defense, courts), it matters little who is spending the money, except fot the incentives to make it. But I would generally prefer spending your money than allow you to spend it yourself. Democratic government gives me the illusion that taxing you is as good as me spending your money, which is really what the progressive view boils down to.

    Mental_Recession 10 October 2010 at 9:04 pm

    Shorter me above: If the best you have is orthodontists will disappear if rates go back to Clinton levels, you got nothing.


      Well, it’d terrify me to go back to the horror of the pre-Bush II years.

      Then again, it’s already been proven that the Chicago professors here (a) don’t know how the tax system works, (b) produce numbers which don’t make sense and (c) if they did add up, show that the professor is a fool.

      Not to mention a WATB who can’t take criticism.

      So by those standards, Mankiw certainly fits in.

    Mental_Recession 10 October 2010 at 9:02 pm

    Here’s my read of the situation.

    Look at Mankiw’s justification for not letting the 2003 rates expire:

    “Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives.. . . As they face higher tax rates, their services will be in shorter supply.”

    Is there any data to support this assertion? A tax rate increase from 35% to 39.6% will result in shortages? Services will be withdrawn from the market?

    This isn’t a serious argument, at least to my mind it is not.

    So, what’s going on? Well, at least two things:

    1. No one likes to pay taxes. Telling people you’ll cut their taxes is politically popular. The Republicans have ridden this horse quite successfully since Reagan, and they’re not about to stop. And their rich benefactors expect them to keep it up.

    But you can’t talk about it in such terms. For example, during the first Gulf War, Jim Baker framed the justification to go to war in one word: “Jobs”. Another word would have been “Oil”, as in an oil price shock will kill the economy. But that didn’t work so well. So, the Bush administration turned to Saddam is Hitler and Iraqi soldiers are stacking incubator babies like fire wood. That worked better.

    So, with regard to taxes, you say dropping rates will result in good things – not just for you, but the economy will grow as well. But that one doesn’t work so well now. That’s what you said in 2003 and look at our 9.x% unemployment / negative GDP economy now.

    So, you try a different tack: If you raise tax rates bad things will happen. Such as? Oh, orthodontist and Brad Pitt shortages.

    2. Here’s the bigger issue, I believe: drown the baby in the bathtub. Yeah, the ‘ol Grover Norquist idea of starving government by denying revenue.

    But you can’t explicitly talk about that, now can you, to voters who, for the most part, like their Social Security/Medicare/Troops/Farm-Ranch subsidies/Low interest rate mortgages, etc.

    So, you’re stuck with silliness like orthodontia scare.



    Yeah, I’m with #6 above.

    Explain to me what the Bush tax cuts accomplished?

    Job growth? Pretty anemic 2003 to 2007. From 2008 to present we’re looking at the worst employment landscape since the Great Depression.

    Economic Growth? Ditto.

    Deficits? Huge growth.

    Income inequality? Huge growth there, too.

    So, why exactly do I want to continue the Bush tax policy legacy? What’s in it for me? What’s in it for the country?

    Mankiw will stop writing? OK, I can live with that.

    Orthodontists will stop othodonting? That didn’t happen during the Great Depression. That didn’t happen during WWII. That didn’t happen under 70% top tax brackets. So, why will that happen now?

    Rich people won’t trickle down their gains? Oh. How would I notice a change?

    save_the_rustbelt 10 October 2010 at 7:25 pm

    Uwe Reinhardt makes a point in some blog comments that has bothered me for a long time.

    We sent troops to Iraq (including apparently Reinhardt’s son) without enough manpower, without enough armored vehicles and without even enough body armor so rich folks could have tax cuts. Those tax cuts, despite the hoopla, only created mediocre economic growth and mediocre job growth. (I’m a conservative Republican, unlike George Bush).

    So I’ll stick with Uwe over Mankiw.


    Last point.

    Consider history. In 1940, top tax brackets looked something like this:

    $ 100,000 62%
    $ 200,000 66%
    $ 300,000 70%
    $ 400,000 72%
    $ 500,000 74%
    $ 750,000 76%
    $1,000,000 77%
    $2,000,000 78%
    $5,000,000 79%

    In 1943, war has been declared and the country goes to a war-time economy, and top tax brackets looks like this:

    $ 100,000 85%
    $ 150,000 87%
    $ 300,000 88%

    Imagine that. The country was still in the grips of the Great Depression, but Americans during WWII had the guts to raise taxes. Of course, they also went on to defeat Nazi Germany and Imperial Japan.

    Contrast with the U.S. from 2000 to 2003.

    – We go the opposite direction. We lower the top bracket from 39.6 to 35.
    – The recession of 2001-03 is nothing compared to the Great Depression, and yet people like Mankiew don’t believe the country can withstand tax hikes and a war-time economy. Rather, we encourage American to shop.
    – We don’t defeat the Taliban or Al Queda after 10 years
    – We start another side war with Iraq
    – We demand less and less sacrifice from civilians at home (e.g., Medicare Part D)

    I’d prefer to go back to a country that gets sh*t done.

    If we’re going to go to war, go to war. Everyone!

    Instead, here we are, 10 years into wars (plural) and we’re talking about taxes must stay at 35% for the over $250,000 crowd or . . . or what?! We’ll friggin melt?

    What would Eisenhower say about our generation?


    One other point. Look at historical tax rates.


    1959 (Eisenhower – R):

    $100,000 75%
    $200,000 89%
    $300,000 90%
    $400,000 91%

    1972 (Nixon – R):

    $100,000 62%
    $200,000 70%

    1984 (Reagan – R):

    $109,400 49%
    $162,400 50%

    Yeah, I’m cherry picking dates, but as you can see, if you look back at US tax bracket history, 39.6% in comparison is just not that high.

    It was only when we reached 1988 and a top tax bracket of 28% that 39.6% looks high.

    Additional point: Those arguing that 39.6% is too high would sure gain some credibility if they had also voiced concern when spending went out of control form 2001 onward. Wars are expensive. Medicare Part D is expensive. If you want low taxes, but you also want to burn money on foreign wars and drug give-aways . . . . well, it’s hard to take that seriously.


    Brad DeLong and Mark Thoma are having none of Mankiw’s nonsense, and good for them:

    Ego or 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.”

    Greg Mankiw Quits the NY Times

    “…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.”


    Point 1.

    Mankiw writes:

    “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.”

    Wow. Twice the incentive sounds like a big deal.

    But look at how he arrived at “twice”. He writes earlier:

    “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.”

    Oh, so that’s $1,000 invested at 8% over 30 years — that’s how he got the “twice”.

    OK, I can use that logic. $40,000,000,000 * 1.08 * 30 = 1,296,000,000,000

    Yeah, that’s a big number. If we let the Bush tax cuts expire on those making greater than $250,000, we get an estimated savings of $40 billion in 2011. If we compound that over 30 years at 8%, that’s almost $1.3 trillion.

    So, if the Federal government invested $40 billion at 8% over 30 years, rather than continue a tax cut for the over $250,000 crowd (of which I am a member, by the way), than we would have roughly 32 times that amount in 30 years. That’s more than Mankiw’s “twice”, yes? That might help with that deficit thingy, right?

    Just putting things in perspective.

    Point 2:

    Larry writes “the tax will affect Mankiw’s incentives”.

    OK, so if Mankiw’s tax rate stays at 35%, he’ll continue to write NYT columns, but if it goes to 39.6% he won’t?

    If Mankiw’s tax rate goes to 39.6, will he continue to blog . . . for free? Or will he stop?

    And if Greg Mankiw stops writing a column or stops blogging, that will impact the economy how?

    Point 3:

    Mankiw writes in closing:

    “But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.”

    Searching the column for evidence supporting this claim, I find:

    “Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives.”

    So, 39.6% will cause surgeons and orthodontists to leave practice? 39.6% will cause a shortage of professional medical care?


    Color me unimpressed.



    Shouldda gone with your first instinct.

    It’s not Obama’s Tax Plan. It’s Bush’s. These increases coming January 1, 2011 are part of a law that expires January 1, 2012.

    I thought you people were attorneys?