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 [Mankiw] 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.
First, the good news
Obama’s tax rates are much lower than Mankiw had anticipated! According to the above quote, his marginal tax rate is currently 80% but threatens to rise to 90%.
But, in October 2008, Mankiw calculated that Obama’s would tax his marginal dollar at 93%. What we’re saying, then, is that Mankiw’s marginal tax rate is currently thirteen percentage points lower than he’d anticipated two years ago. In fact, Mankiw’s stated current marginal tax rate of 80% is three points lower than the tax rate he expected to pay under a McCain administration! And if the proposed new tax laws are introduced, Mankiw’s marginal tax rate of 90% is still three percentage points lower than he’d anticipated, back during the 2008 election campaign. I assume that, for whatever reason, Obama did not follow through on all his tax-raising promises.
To frame the numbers more dramatically: According to Mankiw’s calculations, he is currently keeping almost three times the proportion of his income that he was expecting to keep under the Obama administration (and 18% more than he was expecting to keep under a hypothetical McCain administration). If the new tax plans are put into effect, Mankiw will still keep 43% more of his money than he was expecting to keep, only two years ago. (For those following along at home, the calculations are (1-0.80)/(1-0.93)=2.9, (1-0.80)/(1-0.83)=1.18, and (1-0.90)/(1-0.93)=1.43.)
Given that Mankiw currently gets to keep 20% of his money—rather than the measly 7% he was anticipating—it’s no surprise that he’s still working!
Now, the bad news
I don’t think Mankiw has fully thought this through.
He writes as if he’s writing newspaper articles for the money. (“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.”) I don’t believe it. I think he’s writing the articles because he has views that he thinks are important and he wants to share them with the world. Like blogging, but with more readers. As you all know, we blog for free. And, for people like Mankiw (or even me), when we write newspaper articles it’s pretty much for free too. There are a lot easier ways for us to make $1000 than to write an article for the newspaper. From a financial standpoint, the only reason to do it is that we were already planning to write the article for free.
In which case, the marginal tax rate doesn’t have anything to do with it. Sure, it’s fun to get these little checks—just the other day, I received a bank deposit from the Wall Street Journal for an article they didn’t publish—but let’s not kid ourselves that we’re doing it for the money, or even for our kids (who I think will do just fine without that extra $1000 in their inheritance).
What Mankiw could do with the money
The last time this came up, a couple of years ago, Mankiw wrote the following in response to Obama’s threatened 93% marginal tax rate:
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.
And here’s what I wrote at the time:
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.
When I get extra money, one thing I spend it on is students, assistants, and postdocs. But, for that, the marginal tax rate is nothing close to 90% or even 80%. 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.
Back to taxes
In writing the above, I’m not trying to suggest that the tax rate be X% or Y% or Z%. I don’t know anything about macroeconomics and have nothing to offer you, the readers, on this topic.
My real point: economics is hard. Greg Mankiw is one of the world’s experts on macroeconomics, but when it comes to a seemingly simple problem in micro—anticipating his personal reactions to taxation—he messes it up, making the classic error of considering only monetary motivations and, bizarrely, suggesting that he’s not out playing with his kids because he’d rather make a thousand bucks writing a newspaper article. It’s not that I think Mankiw is insincere; I think he just underestimates the difficulty of thinking clearly about decision making. (I know much much much less than Mankiw about economics, but I’ve done enough research in decision analysis to know the challenges that arise in analyzing even the simplest decisions.)
The irony of hard-headedness
The irony is that Mankiw (like so many people, particularly economists!) is conditioned to be hard-headed and think that it’s all about the benjamins, when, really, he’s writing newspaper articles for the completely sane reason that he wants to make the world a better place, and he’d like to do this by presenting cogent arguments that can help convince people that his views are correct. I assume that Mankiw sincerely believes that higher taxes on the rich are a bad thing and will ultimately make everyone less well-off (just as Krugman, say, believes the opposite). But he feels uncomfortable characterizing his actions as idealistic and, as a result, ends up placing his work and child-care decisions into a nearly nonsensical framework of dollars and cents.
P.S. More here.
All questions of tax policy aside, I think the above story is important, in that it illustrates how a smart guy can get trapped inside a mathematical model and not even realize it, sort of the philosophical equivalent of a person living on a large, interesting island who naively thinks that this island is the entire world.
As I wrote in the comments thread, I don’t think Mankiw is being insincere. My guess is that he’s being sincere but is working within an impoverished model that does not fully account for non-monetary rationales for his work. He can accept that he plays with his kids for non-monetary reasons; why is it so difficult to accept that he writes newspaper columns for nonmonetary reasons also? I’m not saying he should not write more columns; I just think it’s a bit silly to analyze that decision based on his dollar compensation for them, given that this has got to be the most minor reason for writing them.