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Greg Mankiw’s work incentives

Mankiw calculates that McCain’s tax plan would tax him at a marginal rate of 83%, while Obama’s would tax his marginal dollar at 93%. He concludes:

The bottom line: If you are one of those people out there trying to induce me [Mankiw] to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

I don’t quite follow Mankiw’s reasoning on the marginal tax rates, except I do get his point that his marginal dollars are all ultimately going to his kids–none of it will be spent in his lifetime, so in that sense he’s talking about different varieties of an estate tax.

I’m more interested in the decision implications.

To start with, it does sound like Mankiw’s kids are already well provided for, and, although I’m sure they’d disagree with me on this, it’s not clear that they would benefit from having more money in the bank when their parents are gone.

So, from that point of view, the question is why Mankiw isn’t already spending more time playing with his kids? I can’t speak for him, but for me, I have to say that it can be fun to work (or even to write blog entries). But, more than that, I feel a sense of obligation to get things done. At some level, getting paid is part of the motivation, but in any particular example I’m not quite sure how it fits in. I do lots of work things that pay me $0; I think they’re important, so I do them.

On the other hand, if I really, really didn’t need the money, I could set my salary to $0 and spend the money on extra postdocs. That would be pretty cool but I can’t really live on $0 and keep my current lifestyle.

For Mankiw, I’m not sure; maybe he makes enough from his textbooks that he doesn’t need much of his academic salary and could possibly do more by converting it into postdocs and research assistants. Or maybe he already has more research assistants than he knows what to do with; I don’t know. But his division of waking hours into “working” or “playing with kids” is, I would guess, not very sensitive to the marginal tax rate.

21 Comments

  1. OneEyedMan says:

    There are some economists that argue that the lifetime supply of labor is inelastic with respect to average wage. You may work more when wages are higher and less when they are lower, but it mostly follows from diminishing marginal returns to income and leisure.

  2. jrhs says:

    I think he probably will be surprised that his kids will not be poorer when they grow up if he decides to spend more time playing with them. Kids can only be kids for so long.

    Oh, there might be a positive correlation between “rich” and “greediness." I could be wrong.

  3. onc says:

    Mankiw's calculation is bogus. He's taken a long horizon, then looked at the total fraction lost to tax compared to a zero tax rate. Given a long enough horizon that fraction can be as close to 100% as he wants, thanks to that "miracle of compounding". 35 years is pretty long, so he gets marginal taxes that are pretty close to 100%.

    Using his same numbers, a dollar earned today yields an 85% after-tax return for his kids under the Obama scenario and a 380% return under the McCain one. (Most of this comes from the difference between 25% vs. 35% corporate tax rates and 20% vs. 15% dividend tax rates). There is indeed a big difference between the two, but the Obama number is not particularly close to zero.

    Another bogosity is that the comparison to zero tax rate is meaningless. He simply can't earn the assumed zero tax rate return – it's not an appropriate benchmark. Or perhaps he could as an individual if he found a great tax shelter. But if everyone's taxes were set to zero, civilization (if the word is still apt) would have a very different character, and there's no reason to assume that he could earn anything at all on his savings to pass along – as opposed to, say, providing for his retirement by having more kids to gather acorns in the forest for his daily bowl of mash and to fight off the other families.

    Lastly, he's assuming full estate taxes at the margin – this might be correct for him, but if so his marginal utility of a $ is probably near zero regardless of the tax rate.

  4. Alex F says:

    There's a much more fundamental problem with Mankiw's calculations. He calculates the marginal rate of taxation on giving an extra speech. Fine. But he's not a speechgiver; he's an economist. He works on a salary and he has tenure. The marginal wage for his real job is 0 — I'm sure he does a huge amount of economics work, but it's for prestige and out of his own interest in the subject, not for money. You can't tax that.

    It's a little ridiculous for a highly regarded academic whose incentive to work comes from internal motivations to complain about federal marginal tax rates. His *real* labor supply is completely inelastic with respect to taxes.

  5. BMH says:

    Government could lower his marginal income tax rates to zero and he would still not be playing with his kids but working endlessly in hope for the nobel prize commitee to give him a call. At least thats my asumption as to his incentives.
    BHM

  6. Andrew Gelman says:

    Just one more reason I'm glad there's no Nobel Prize in statistics.

  7. Lord says:

    If all he works for is money, he needs to find another line of work.

  8. ZBicyclist says:

    I second onc's comment. This is a "gee-whiz" calculation.

    Still, his instincts are right. Blow off the extra speeches and spend time with the kids.

    If you value time spent with charming, friendly grandchildren in your retirement years at, say, $25 an hour the best investment is to raise your children well.

  9. Alex F says:

    BMH or BHM?

    … or, is it really BHO?

  10. Kevin Miller says:

    No one seems to have commented on the irony that this was written on a blog post that, according to his analysis, he should not have written (since it's clearly uncompensated work under any tax regime). He's rich enough that he doesn't need to do things he otherwise doesn't want to do for money. Congratulations to him. Were he not, presumably he'd have to work *harder* under the Obama tax regime.

    Left unexplained is why our goal should be to induce him to do something for money that he would otherwise not do, rather than focusing incentives on someone who actually needs the money.

    One would think that economists would understand incentives, and yet this doesn't seem to be the case.

  11. VanEs says:

    Hey, if Mankiw wants to slack off it's fine with me. Much like the "work" he did for the Bush administration, I don't imagine whatever it is he's doing now is going to be of much help to any of us at this point.

  12. save_the_rustbelt says:

    Having done tax planning and tax return preparation for 30+ years, Mankiw's calculations are not tied to the realities of life.

    As pointed out above.

  13. Barry says:

    Mankiw is a hack. Any argument which he makes should be evaluated as coming from a man who sold his Harvard professorship for a nice sack of GOP cash.

  14. eightnine2718281828m says:

    Cormorant fisherman only allow the birds to keep the fraction of their prey equivalent to the bird's subsistence level; the fisherman's high tax rate guarantees the bird's full engagement in the task at hand.

    I think that Mankiw's talents are so valuable to society that we need to tax him at 99.99%; that way he has to work like a demon just to avoid starvation.

  15. TCO says:

    Maybe the population of people motivated by money has already been lost at 83%, so going to 95% makes little difference in numbers of people and you just fleece the remaining suckers harder. The people who are motivated by money have either stopped working or decided to cheat on their taxes.

  16. Frank DiTraglia says:

    My this thread has become heated!

    First of all, regardless of whether you agree with his blog post, Mankiw is not a hack. He is a serious and well-respected economist. As for his politics, chacun ses goûts. We should at least be civil.

    Kevin raised an interesting point:

    "Left unexplained is why our goal should be to induce him to do something for money that he would otherwise not do, rather than focusing incentives on someone who actually needs the money."

    Quite independent of the aims of Mankiw's calculation, this is an important question. Here's the answer: voluntary transactions increase welfare. It doesn't matter if you "need" the money, whatever that means. If I'm willing to pay Greg $10 to deliver a speech, that's because I value the speech at more than $10. If Greg agrees to deliver the speech, that's because he values his spare time at less than $10. If the transaction takes place, we both gain. When a tax disrupts such transactions there is a welfare loss to society in excess of the revenue collected by the tax. This is the deadweight loss from taxation, and it is equivalent to burning money.

    This is not to say that we should do away with taxes. No one would argue that. But economists consider it important to calculate the size of the deadweight losses from different flavors of taxation. Why? Presumably we should try to burn as little money while raising revenue. Of course there might be fairness concerns rolled up with taxation. But if neither of two potential taxes offends our notions of equity, why shouldn't we choose the one with the smaller deadweight loss?

  17. Andrew Gelman says:

    Frank,

    Indeed, I was not trying to criticize Mankiw's politics or his lifestyle choices; I was merely suggesting (based on extrapolation from my own experiences) that his personal allocation of time-at-work and time-with-kids might be less sensitive to the tax rate than he might think. (I think I'm like a lot of people in that, when I'm at work, I'd often rather be playing with my kids, and, when I'm with my kids, I'm often trying to find time to work.)

    Regarding the commenters, part of this might be pent-up demand because Mankiw does not have comments on his own blog. Actually, as far as blog comment threads go, I think the commenters at this blog are pretty polite…

  18. Frank DiTraglia says:

    Andrew,

    I'm sorry if I gave the impression that I found your thoughts impolite; I certainly did not. I was only referring to some of the more colorful comments.

    Indeed, one of my favorite things about this blog is its civility, and the general politeness of the comments. I suppose negative comments will find voice somewhere, even if it's on someone else's blog–the negative externality of the blogosphere.

  19. Barry says:

    Frank DiTraglia | December 6, 2008 4:46 PM |

    'My this thread has become heated!

    First of all, regardless of whether you agree with his blog post, Mankiw is not a hack. He is a serious and well-respected economist.'

    Who worked for the Bush administration, and who had to drop the comments for his blog because he couldn't take the heat.

    In a way, you're right – Mankiw is not a hack, in that he *does* know better. that's worse.

    As for 'well-respected economist', that's not saying much. That profession got us to where we are today.

    'As for his politics, chacun ses goûts.'

    Have you noticed the last 8 years? Maybe that was to your taste, but not to a lot of people's.
    I really hope that you'll be laid off, and you can then have lots of time to taste.

  20. Siah says:

    When I was an undergrad I used to love Mankiw's books, now I am a grad student at Berkeley and seriously believe that Mankiw is a “hack''. I enjoy his blog once in a while but he is running on false assumptions and mechanical analysis most of the times. Regardless of what everyone else says I believe mankiw lacks basic knowledge of “Scientific Method''. I hope it is not offensive.

  21. Barry says:

    Andrew, thanks for your forbearance. At another blog (lost the reference!), somebody pointed out that Mankiw basically 'earns' his money from his econ textbook, putting out new editions, with very little work (assuming that he does it, and not some grad students).

    He's made his nice niche, and occasionally flicks his foot at the crank to keep the money machine turning, as he sits on his couch.

    His tax incentives really don't matter, compared to ours. *Our* work changes might involve working a second job, or overtime in the evenings. For those of us who have done this, it's actual work, coming after a full-time job has drained our time and energy.

    *His*, at this point, at the most, involve taking a first class flight to a nice resort, giving a canned speech, and spending a night or two in a luxury hotel.

    As to his comments – I recall Matthew Yglesias ripping one of Mankiw's blog posts apart like Hulk Hogan attacking a wet paper-maiche mannequin. Now Matt is more of a post child for the idea that the chief benefit of a Harvard undergrad degree is networking; he's not exactly a prodigy. At that point I realized that an amature had bested a Harvard prof (-fessor and -fessional), and that this wasn't due to Matt's genius, but from the fact that Mankiw was bullsh*tting.

    That's what Mankiw does in public, and that's how we judge him.